Notion doesn’t all the time match actuality. We suspected this can be the case in the case of the extensively held perception that Bitcoin is significantly extra unstable than different asset courses.
We examined our idea by revisiting Mieszko Mazur’s 2022 paper, “Misperceptions of Bitcoin Volatility.” On this weblog put up, we’ll talk about Mazur’s methodology, refresh his knowledge, and illustrate why it’s finest to method the subject of Bitcoin volatility analytically and with an open thoughts.
The Starting
Bitcoin started its journey as an esoteric whitepaper printed within the hinterlands of the World Extensive Internet in 2008. As of mid-2024, nevertheless, its market capitalization sits at a formidable ~$1.3 trillion, and it’s now the “poster little one” of digital property. “Valuation of Cryptoassets: A Guide for Investment Professionals,” from the CFA Institute Analysis and Coverage Middle, opinions the instruments obtainable to worth cryptoassets together with Bitcoin.
The specter of Bitcoin’s volatility from its early days looms massive and is omnipresent in any dialogue about its standing as a forex or its intrinsic worth. Vanguard CEO Tim Buckley lately dismissed the potential for together with the cryptoasset in long-term portfolios, saying that Bitcoin is too volatile. Does his notion match actuality?
Mazur’s Findings
Mazur’s examine targeted on the months previous, throughout, and after the March 2020 inventory market crash triggered by the COVID-19 disaster (e.g., the market crash interval). His key purpose was to discern Bitcoin’s comparative resilience and worth conduct surrounding a market crash interval. He targeted on three indicators: relative rating of each day realized volatility, each day realized volatility, and range-based realized volatility.
Right here’s what he discovered:
Relative Rating of Each day Realized Volatility
- Bitcoin’s return fluctuations had been decrease than roughly 900 shares within the S&P 1500 and 190 shares within the S&P 500 through the months previous, throughout, and after the March 2020 inventory market crash.
- Through the market crash interval, Bitcoin was much less unstable than property like oil, EU carbon credit, and choose bonds.
Each day Realized Volatility
- Over the previous decade, there was a major decline in Bitcoin’s each day realized volatility.
Vary-Based mostly Realized Volatility
- Bitcoin’s range-based realized volatility of Bitcoin was considerably increased than the usual measure, utilizing each day returns.
- Its range-based realized volatility was decrease than a protracted listing of S&P 1500 constituents through the market crash interval.
Do these conclusions carry over to the current day?
Our Methodology
We analyzed knowledge from late 2020 to early 2024. For sensible causes, our knowledge sources for sure property diverged from these used within the unique examine and we selected to emphasise standardized percentile rankings for ease of interpretation. We examined the identical three indicators, nevertheless: relative rating of each day realized volatility1, each day realized volatility2, and range-based realized volatility3. As well as, for carbon credit, we used an ETF proxy (KRBN) as a substitute of the EU carbon credit Mazur utilized in his examine. BTC/USD was the forex pair analyzed.
Relative Each day Realized Volatility: An Up to date View
In Exhibit 1, increased percentiles denote better volatility with respect to the constituents of the S&P 1500. From November 2020 to February 2024, Bitcoin’s each day realized volatility rank equated to the ~eightieth percentile relative to the S&P 1500 on common.
Exhibit 1. Bitcoin’s Each day Realized Volatility Percentile Rank vs. S&P 1500
Sources and Notes: EODHD; grey areas symbolize Market Shocks and better percentile = increased volatility.
For subsequent market crises, Bitcoin’s relative volatility rankings had increased peaks in comparison with the crash triggered by COVID-19 however related ranges for essentially the most half. Notably, as depicted in Exhibit 2, in Might 2020 and December 2022 Bitcoin was much less unstable than the median S&P 1500 inventory.
Exhibit 2. Bitcoin’s Each day Realized Volatility Throughout Market Shocks
Sources & Notes: Mazur (2022) and EODHD; the COVID-19 Crash ranks and each day realized volatility are derived immediately from the unique examine. Rank of 1 = highest volatility worth; percentiles are inverted such that increased percentiles = increased volatility worth.
Exhibit 3. Bitcoin’s Each day Realized Volatility vs. Different Belongings Throughout Market Shocks
Sources and Notes: EODHD, FRED, S&P World, Tullet Prebon, and Yahoo! Finance; numbers are the utmost each day realized volatilities for the indicated time interval.
Absolute Each day Realized Volatility: An Up to date View
True to Mazur’s findings, Bitcoin’s volatility continued to pattern downward and skilled progressively decrease peaks. Between 2017 and 2020, there have been a number of episodes of spikes that surpassed annualized volatility of 100%. Information from 2021 onward painted a special image.
- 2021 peak: 6.1% (97.3% annualized) in Might.
- 2022 peak: 5.5% (87.9% annualized) in June.
- 2023 peak: 4.1% (65.7% annualized) in March.
Exhibit 4. Each day Realized Volatility over Time
Supply: EODHD.
Vary-Based mostly Realized Volatility: An Up to date View
In line with Mazur’s findings, range-based realized volatility was 1.74% increased than each day realized volatility, although this was not solely shocking given our chosen calculation. Bitcoin’s range-based realized volatility was within the ~79th percentile relative to the S&P 1500 on common.
What’s fascinating, nevertheless, is that range-based realized volatility has not skilled a proportionate discount in excessive peaks over current years. The notably increased ranges of range-based in comparison with each day close-over-close realized volatility, mixed with media protection that emphasizes inter-day actions over longer time horizons, counsel that this discrepancy is a main issue contributing to the notion that Bitcoin is extremely unstable.
Exhibit 5. Vary-Based mostly Realized Volatility over Time and Percentile Rating Relative to S&P 1500
Supply: EODHD. Word: Rank of 1 = highest volatility worth; percentiles are inverted such that increased percentiles = increased volatility worth.
Findings
Of all of Mazur’s conclusions, the discovering pertaining to Bitcoin’s relative each day realized volatility didn’t maintain up in our evaluation, as a result of its efficiency relative to different asset courses throughout market shocks degraded. Conversely, most of Mazur’s findings, together with daily- and range-based realized volatility of Bitcoin, nonetheless maintain true.
Relative Rating of Volatility: Diminished in Energy
- With respect to the market shocks that adopted the COVID-19 crash analyzed within the examine, Bitcoin’s each day realized volatility percentile rankings had been similar to the S&P 1500.
- Nonetheless, Bitcoin’s each day realized volatility was better than nearly all chosen asset courses and confirmed the best each day volatility throughout market shocks, aside from oil and carbon credit through the Russia-Ukraine battle.
Each day Realized Volatility Over Time: Strengthened
- In line with Mazur’s findings, we discovered {that a} longer time horizon helps us cut back “cherry selecting.” As such, Bitcoin’s each day realized volatility has proven a gradual but clear decline over time, with decrease peaks noticed over the previous few years.
Vary-Based mostly Realized Volatility: Strengthened
- On common, month-to-month range-based realized volatility has been 1.74% increased than each day realized volatility since November 2020.
- Bitcoin’s range-based realized volatility was nonetheless decrease than just a few hundred names from the S&P 1500 on a median month-to-month foundation.
Key Takeaways
Our replace of Mazur’s examine discovered that Bitcoin will not be as unstable as perceived. This was evidenced by its percentile rankings in comparison with the constituents of the S&P 1500, the disparity between its each day realized and range-based realized volatility, and the gradual decline of its each day realized volatility over time.
With mainstream adoption of Bitcoin growing alongside additional laws, the notion of its volatility will proceed to evolve. This overview of Mazur’s analysis underscores the significance of approaching this matter analytically and with an open thoughts. Perceptions don’t all the time match actuality.
