Still wrong? A Fresh Look at Bitcoin Volatility (Cryptocurrency: BTC-USD)

Notion doesn’t all the time match actuality. We suspected that this may be the case in the case of the widespread perception that Bitcoin is far more risky than different asset courses.

We examined ours principle, revisiting Mieszko Mazur’s 2022 article, “Misperception of Bitcoin Volatility.” On this weblog submit, we’ll focus on Mazur’s methodology, replace his information, and illustrate why the subject of Bitcoin volatility is finest approached analytically and overtly.

The start

Bitcoin started its journey as an esoteric doc printed within the backwaters of the World Broad Net in 2008. Nonetheless, as of mid-2024, it has a market cap of a formidable ~$1.3 trillion and is now the “poster youngster” of digital know-how. property.

The specter of bitcoin volatility since its early days is looming and omnipresent within the any debate about its standing as a foreign money or its intrinsic worth. Vanguard CEO Tim Buckley just lately dismissed the potential of together with crypto-assets in long-term portfolios, saying that Bitcoin is simply too risky. Is his notion true?

Mazur finds

Mazur’s analysis targeted on the months earlier than, throughout, and after the March 2020 inventory market crash attributable to the COVID-19 disaster (ie, the market crash interval). Its predominant goal was to disclose the comparative resilience of Bitcoin and its worth habits in the course of the market crash. He targeted on three metrics: Relative Every day Realized Volatility Rating, Every day Realized Volatility, and Vary-Based mostly Realized Volatility.

Here is what he discovered:

Relative Every day Realized Volatility Rating

• Bitcoin’s return swings had been decrease than roughly 900 shares within the S&P 1500 and 190 shares within the S&P 500 within the months earlier than, throughout, and after the March 2020 inventory market crash.
• Bitcoin has been much less risky than property akin to oil, EU carbon credit and particular person bonds in the course of the market crash.

Every day realized volatility

• Bitcoin’s every day realized volatility has fallen considerably over the previous decade.

Realized volatility primarily based on vary

• Bitcoin’s range-based realized volatility was considerably larger than the usual measure primarily based on every day returns.
• Its range-based realized volatility was decrease than that of an extended record of S&P 1500 constituents in the course of the market crash.

Do these conclusions attain the current day?

Our methodology

We analyzed information from late 2020 to early 2024. For sensible causes, our information sources for sure property differed from these used within the authentic research, and we selected to deal with standardized rates of interest for ease of interpretation. Nonetheless, we examined the identical three indicators: the relative rating of every day realized volatility¹every day realized volatility²and realized volatility primarily based on vary³. Additionally, for carbon credit, we used a proxy ETF (KRBN) as an alternative of the EU carbon credit that Mazur utilized in his research. The BTC/USD foreign money pair has been analyzed.

Relative Every day Realized Volatility: Up to date View

U Exhibition 1larger percentages imply extra volatility relative to the constituents of the S&P 1500. From November 2020 to February 2024, Bitcoin’s every day realized volatility rank equated to the ~76th percentile relative to the S&P 1500 on common.

Appendix 1. Bitcoin Every day Realized Volatility Percentile vs S&P 1500

Throughout subsequent market crises, Bitcoin’s relative volatility ranking had larger peaks in comparison with the crash attributable to COVID-19, however for probably the most half the ranges had been comparable. Particularly, as proven in Exhibition 2in Might 2020 and December 2022, Bitcoin was much less risky than the S&P 1500 common.

Appendix 2. Every day Realized Bitcoin Market Volatility

Exhibition 3 exhibits that Bitcoin confirmed probably the most volatility in comparison with all different chosen property in the course of the market shocks listed, with some exceptions akin to oil and carbon credit in the course of the begin of the Russian-Ukrainian battle.

Exhibit 3. Every day Realized Volatility of Bitcoin In comparison with Different Market Property

Absolute Every day Realized Volatility: Up to date View

Consistent with Mazur’s findings, Bitcoin’s volatility continued to say no and hit decrease and decrease peaks. Between 2017 and 2020, there have been a number of episodes of spikes that exceeded 100% annual volatility. Information from 2021 exhibits a distinct image.

• 2021 peak: 6.1% (97.3% y/y) in Might.
• 2022 Peak: 5.5% (87.9% YoY) in June.
• 2023 Peak: 4.1% (65.7% YoY) in March.

Appendix 4. Every day realized volatility over time

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

In keeping with Mazur’s findings, range-based realized volatility was 1.74% larger than every day realized volatility, though this was not totally stunning given the calculation we selected. Bitcoin’s realized volatility primarily based on the vary was ~79^thousand percentile relative to the S&P 1500 common.

What’s fascinating, nevertheless, is that range-based realized volatility has not skilled a commensurate decline in excessive peaks lately. Considerably larger ranges of range-based versus every day realized close-to-close volatility, coupled with media protection emphasizing intraday actions over longer time horizons, means that this divergence is a significant driver of the notion. that bitcoin may be very excessive risky.

Exhibit 5. Vary-Based mostly Realized Volatility Over Time and P.c Rating Relative to the S&P 1500

Findings

Of all Mazur’s findings, the one relating 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 courses deteriorated throughout market shocks. Conversely, most of Mazur’s findings, together with Bitcoin’s every day and range-based realized volatility, nonetheless maintain true.

Relative Volatility Ranking: Decreased Energy

• For the market shocks that adopted the COVID-19 crash analyzed within the research, the every day realized share volatility of the ranking was corresponding to the S&P 1500.
• Nonetheless, Bitcoin’s every day realized volatility was higher than virtually all the chosen asset courses and confirmed the very best every day volatility throughout market shocks, apart from oil and carbon credit in the course of the Russo-Ukraine battle.

Every day Realized Volatility Over Time: Enhanced

• In keeping with Mazur’s findings, we discovered {that a} longer time horizon helps us cut back “cherry selecting.” Thus, Bitcoin’s every day realized volatility exhibits a gradual however clear decline over time, with decrease peaks seen over the previous few years.

Vary-Based mostly Realized Volatility: Enhanced

• On common, the month-to-month realized volatility primarily based on the vary has been 1.74% larger than the every day realized volatility since November 2020.
• Bitcoin’s range-based realized volatility was nonetheless decrease than the S&P 1500’s month-to-month common by a number of hundred names.

Key conclusions

Our replace on Mazur’s analysis has proven that Bitcoin just isn’t as risky because it appears. That is evidenced by the percentile rankings relative to the S&P 1500 constituents, the discrepancy between every day realized volatility and range-based realized volatility, and the gradual decline in every day realized volatility over time.

As mainstream adoption of Bitcoin expands, together with additional rules, the notion of its volatility will proceed to evolve. This evaluate of Mazur’s analysis highlights the significance of approaching this matter analytically and overtly. Perceptions don’t all the time match actuality.

Footnotes

1. To investigate the relative resilience in the course of the disaster interval, we recovered from the Masurian endpoint in late 2020, continued in early 2024, and recognized three “market shocks” that occurred: (1) the onset of the Russian-Ukrainian battle; (2) the US banking disaster; and (3) FTX failure.
2. For every day realized volatility, in accordance with the unique paper, these figures confer with the utmost common commonplace deviation of the overlapping returns over 21 buying and selling days (equal to 30 calendar days/one month) utilizing equal weighting. The figures offered symbolize the utmost value of motion achieved throughout a calendar month. For Treasuries and company bonds, volatility is measured utilizing the usual deviation of the overlapping returns slightly than the yield.
3. To investigate range-based volatility, we selected the 21-day most shifting common true vary occurring over a calendar month as an alternative of the range-based methodology of Goetzmann and Massa (2008) cited within the paper for completeness. he makes use of Our methodology captures the present day’s vary excessive, absolutely the distinction between the present day’s excessive and yesterday’s shut, and absolutely the distinction between the present day’s low and yesterday’s shut. The 21-day ATR is normalized by dividing it by the closing worth on the final day of the shifting window. Whereas Bitcoin is traded repeatedly, exchanges set a cut-off time every day for the required “excessive”, “low”, and “shut” entries wanted to calculate the valuation.

Disclaimer: Please word that the content material of this web site shouldn’t be construed as funding recommendation and the opinions expressed don’t essentially mirror the views of CFA Institute.

Authentic submit

Editor’s word: The bullet factors for this text had been chosen by the editors of In search of Alpha.