Nonetheless Misperceived? A Recent Have a look at Bitcoin Volatility

Notion doesn’t at all times match actuality. We suspected this can be the case in the case of the broadly held perception that Bitcoin is significantly extra unstable than different asset lessons.

We examined our principle by revisiting Mieszko Mazur’s 2022 paper, “Misperceptions of Bitcoin Volatility.” On this weblog publish, we are going to talk about Mazur’s methodology, refresh his information, and illustrate why it’s greatest 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 Information for Funding Professionals,” from the CFA Institute Analysis and Coverage Heart, 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 just lately dismissed the potential for together with the cryptoasset in long-term portfolios, saying that Bitcoin is just too unstable. Does his notion match actuality?

Mazur’s Findings

Mazur’s research 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 value habits surrounding a market crash interval. He targeted on three indicators: relative rating of every day realized volatility, every day realized volatility, and range-based realized volatility.

Right here’s what he discovered:

Relative Rating of Every day Realized Volatility

• Bitcoin’s return fluctuations have 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.
• Throughout the market crash interval, Bitcoin was much less unstable than property like oil, EU carbon credit, and choose bonds.

Every day Realized Volatility

• Over the previous decade, there was a big decline in Bitcoin’s every day realized volatility.

Vary-Based mostly Realized Volatility

• Bitcoin’s range-based realized volatility of Bitcoin was considerably increased than the usual measure, utilizing every day returns.
• Its range-based realized volatility was decrease than an extended checklist of S&P 1500 constituents through the market crash interval.

Do these conclusions carry over to the current day?

Our Methodology

We analyzed information from late 2020 to early 2024. For sensible causes, our information sources for sure property diverged from these used within the authentic research and we selected to emphasise standardized percentile rankings for ease of interpretation. We examined the identical three indicators, nevertheless: relative rating of every day realized volatility¹, every 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 research. BTC/USD was the forex pair analyzed.

Relative Every 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 every day realized volatility rank equated to the ~eightieth percentile relative to the S&P 1500 on common.

Exhibit 1. Bitcoin’s Every day Realized Volatility Percentile Rank vs. S&P 1500

Sources and Notes: EODHD; grey areas characterize 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 Every day Realized Volatility Throughout Market Shocks

Sources & Notes: Mazur (2022) and EODHD; the COVID-19 Crash ranks and every day realized volatility are derived immediately from the unique research. Rank of 1 = highest volatility worth; percentiles are inverted such that increased percentiles = increased volatility worth.

Exhibit 3 reveals that Bitcoin exhibited the best volatility in comparison with all different chosen property through the listed market shocks with some exceptions, reminiscent of oil and carbon credit, through the graduation of the Russia-Ukraine battle.

Exhibit 3. Bitcoin’s Every day Realized Volatility vs. Different Property Throughout Market Shocks

Sources and Notes: EODHD, FRED, S&P International, Tullet Prebon, and Yahoo! Finance; numbers are the utmost every day realized volatilities for the indicated time interval.

Absolute Every 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%. Knowledge from 2021 onward painted a unique 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. Every day Realized Volatility over Time

Source: EODHD.

Vary-Based mostly Realized Volatility: An Up to date View

According to Mazur’s findings, range-based realized volatility was 1.74% increased than every day realized volatility, although this was not fully stunning given our chosen calculation. Bitcoin’s range-based realized volatility was within the ~79^th percentile relative to the S&P 1500 on common.

What’s attention-grabbing, nevertheless, is that range-based realized volatility has not skilled a proportionate discount in excessive peaks over latest years. The notably increased ranges of range-based in comparison with every 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 major 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

Source: EODHD. Be aware: 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 every day realized volatility didn’t maintain up in our evaluation, as a result of its efficiency relative to different asset lessons 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 Power

• With respect to the market shocks that adopted the COVID-19 crash analyzed within the research, Bitcoin’s every day realized volatility percentile rankings have been similar to the S&P 1500.
• Nonetheless, Bitcoin’s every day realized volatility was better than virtually all chosen asset lessons and confirmed the best every day volatility throughout market shocks, apart from oil and carbon credit through the Russia-Ukraine conflict.

Every day Realized Volatility Over Time: Bolstered

• According to Mazur’s findings, we discovered {that a} longer time horizon helps us cut back “cherry choosing.” As such, Bitcoin’s every 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: Bolstered

• On common, month-to-month range-based realized volatility has been 1.74% increased than every 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 research 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 every day realized and range-based realized volatility, and the gradual decline of its every day realized volatility over time.

With mainstream adoption of Bitcoin rising alongside additional rules, the notion of its volatility will proceed to evolve. This overview of Mazur’s analysis underscores the significance of approaching this subject analytically and with an open thoughts. Perceptions don’t at all times match actuality.

Footnotes