Notion doesn’t at all times match actuality. We suspected this can be the case in terms of the extensively held perception that Bitcoin is significantly extra risky than different asset lessons.
We examined our principle 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 Extensive 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 belongings. “Valuation of Cryptoassets: A Information for Funding Professionals,” from the CFA Institute Analysis and Coverage Middle, opinions the instruments accessible 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 risky. 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 goal was to discern Bitcoin’s comparative resilience and value conduct surrounding a market crash interval. He centered 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 have 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.
- Throughout the market crash interval, Bitcoin was much less risky than belongings 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-Primarily based Realized Volatility
- Bitcoin’s range-based realized volatility of Bitcoin was considerably greater than the usual measure, utilizing each day returns.
- Its range-based realized volatility was decrease than a protracted listing 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 belongings 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, nonetheless: 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 an alternative of the EU carbon credit Mazur utilized in his examine. BTC/USD was the foreign money pair analyzed.
Relative Each day Realized Volatility: An Up to date View
In Exhibit 1, greater percentiles denote higher 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 ~76th 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 = greater volatility.
For subsequent market crises, Bitcoin’s relative volatility rankings had greater peaks in comparison with the crash triggered by COVID-19 however comparable ranges for probably the most half. Notably, as depicted in Exhibit 2, in Might 2020 and December 2022 Bitcoin was much less risky 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 instantly from the unique examine. Rank of 1 = highest volatility worth; percentiles are inverted such that greater percentiles = greater volatility worth.
Exhibit 3. Bitcoin’s Each 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 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%. 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. Each day Realized Volatility over Time
Supply: EODHD.
Vary-Primarily based Realized Volatility: An Up to date View
In keeping with Mazur’s findings, range-based realized volatility was 1.74% greater than each day realized volatility, although this was not totally 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 current years. The notably greater 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 risky.
Exhibit 5. Vary-Primarily based 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 greater percentiles = greater 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 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 each day realized volatility percentile rankings have been corresponding to the S&P 1500.
- Nevertheless, Bitcoin’s each day realized volatility was higher than nearly all chosen asset lessons and confirmed the very best each day volatility throughout market shocks, aside from oil and carbon credit in the course of the Russia-Ukraine conflict.
Each day Realized Volatility Over Time: Strengthened
- In keeping with Mazur’s findings, we discovered {that a} longer time horizon helps us scale 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-Primarily based Realized Volatility: Strengthened
- On common, month-to-month range-based realized volatility has been 1.74% greater 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 isn’t as risky 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 rising 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 at all times match actuality.
