Notion doesn’t all the time match actuality. We suspected this can be the case in terms of the extensively held perception that Bitcoin is significantly extra unstable than different asset lessons.
We examined our idea by revisiting Mieszko Mazur’s 2022 paper, “Misperceptions of Bitcoin Volatility.” On this weblog publish, we’ll focus on 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 revealed within the hinterlands of the World Large Internet in 2008. As of mid-2024, nonetheless, 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 out there to worth cryptoassets together with Bitcoin.
The specter of Bitcoin’s volatility from its early days looms giant and is omnipresent in any dialogue about its standing as a foreign money or its intrinsic worth. Vanguard CEO Tim Buckley not too long ago 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 examine centered 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 intention was to discern Bitcoin’s comparative resilience and worth conduct surrounding a market crash interval. He centered 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 had been decrease than roughly 900 shares within the S&P 1500 and 190 shares within the S&P 500 in the course of the months previous, throughout, and after the March 2020 inventory market crash.
- In the course of 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 major decline in Bitcoin’s every day realized volatility.
Vary-Based mostly Realized Volatility
- Bitcoin’s range-based realized volatility of Bitcoin was considerably larger than the usual measure, utilizing every day returns.
- Its range-based realized volatility was decrease than a protracted record of S&P 1500 constituents in the course of 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 authentic examine and we selected to emphasise standardized percentile rankings for ease of interpretation. We examined the identical three indicators, nonetheless: 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 an alternative of the EU carbon credit Mazur utilized in his examine. BTC/USD was the foreign money pair analyzed.
Relative Every day Realized Volatility: An Up to date View
In Exhibit 1, larger percentiles denote larger 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
For subsequent market crises, Bitcoin’s relative volatility rankings had larger 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 straight from the unique examine. Rank of 1 = highest volatility worth; percentiles are inverted such that larger percentiles = larger volatility worth.
Exhibit 3. Bitcoin’s Every day Realized Volatility vs. Different Property Throughout Market Shocks
Sources and Notes: EODHD, FRED, S&P World, 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 development 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 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
Supply: EODHD.
Vary-Based mostly Realized Volatility: An Up to date View
In keeping with Mazur’s findings, range-based realized volatility was 1.74% larger than every day realized volatility, although this was not completely stunning 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 attention-grabbing, nonetheless, is that range-based realized volatility has not skilled a proportionate discount in excessive peaks over latest years. The notably larger 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, recommend 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. Notice: Rank of 1 = highest volatility worth; percentiles are inverted such that larger percentiles = larger 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 examine, Bitcoin’s every day realized volatility percentile rankings had been akin to the S&P 1500.
- Nonetheless, Bitcoin’s every day realized volatility was larger than virtually all chosen asset lessons and confirmed the very best every day volatility throughout market shocks, apart from oil and carbon credit in the course of the Russia-Ukraine struggle.
Every day Realized Volatility Over Time: Strengthened
- In keeping with Mazur’s findings, we discovered {that a} longer time horizon helps us cut back “cherry selecting.” 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: Strengthened
- On common, month-to-month range-based realized volatility has been 1.74% larger than every day realized volatility since November 2020.
- Bitcoin’s range-based realized volatility was nonetheless decrease than a number of hundred names from the S&P 1500 on a mean month-to-month foundation.
Key Takeaways
Our replace of Mazur’s examine discovered that Bitcoin just isn’t 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 growing alongside additional rules, the notion of its volatility will proceed to evolve. This evaluate of Mazur’s analysis underscores the significance of approaching this subject analytically and with an open thoughts. Perceptions don’t all the time match actuality.
