Notion doesn’t all the time match actuality. We suspected this can be the case in the case of the broadly held perception that Bitcoin is significantly extra risky than different asset courses.
We examined our concept by revisiting Mieszko Mazur’s 2022 paper, “Misperceptions of Bitcoin Volatility.” On this weblog publish, we’ll focus on Mazur’s methodology, refresh his information, and illustrate why it’s greatest to strategy 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, nonetheless, its market capitalization sits at a powerful ~$1.3 trillion, and it’s now the “poster youngster” of digital belongings. “Valuation of Cryptoassets: A Information for Funding Professionals,” from the CFA Institute Analysis and Coverage Middle, critiques 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 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 risky. 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 goal was to discern Bitcoin’s comparative resilience and value conduct surrounding a market crash interval. He targeted on three indicators: relative rating of day by day realized volatility, day by day realized volatility, and range-based realized volatility.
Right here’s what he discovered:
Relative Rating of Day by 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 throughout the months previous, throughout, and after the March 2020 inventory market crash.
- In the course of the market crash interval, Bitcoin was much less risky than belongings like oil, EU carbon credit, and choose bonds.
Day by day Realized Volatility
- Over the previous decade, there was a big decline in Bitcoin’s day by day realized volatility.
Vary-Primarily based Realized Volatility
- Bitcoin’s range-based realized volatility of Bitcoin was considerably greater than the usual measure, utilizing day by day returns.
- Its range-based realized volatility was decrease than an extended record of S&P 1500 constituents throughout 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 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 day by day realized volatility1, day by 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 Day by day Realized Volatility: An Up to date View
In Exhibit 1, greater percentiles denote better volatility with respect to the constituents of the S&P 1500. From November 2020 to February 2024, Bitcoin’s day by day realized volatility rank equated to the ~eightieth percentile relative to the S&P 1500 on common.
Exhibit 1. Bitcoin’s Day by day Realized Volatility Percentile Rank vs. S&P 1500
Sources and Notes: EODHD; grey areas signify 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 essentially 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 Day by day Realized Volatility Throughout Market Shocks
Sources & Notes: Mazur (2022) and EODHD; the COVID-19 Crash ranks and day by 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 Day by 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 day by day realized volatilities for the indicated time interval.
Absolute Day by 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%. Knowledge 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. Day by day Realized Volatility over Time
Supply: EODHD.
Vary-Primarily based Realized Volatility: An Up to date View
In step with Mazur’s findings, range-based realized volatility was 1.74% greater than day by day realized volatility, although this was not fully 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 attention-grabbing, nonetheless, is that range-based realized volatility has not skilled a proportionate discount in excessive peaks over latest years. The notably greater ranges of range-based in comparison with day by 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. Word: 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 day by 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 day by day realized volatility percentile rankings had been similar to the S&P 1500.
- Nevertheless, Bitcoin’s day by day realized volatility was better than virtually all chosen asset courses and confirmed the best day by day volatility throughout market shocks, apart from oil and carbon credit throughout the Russia-Ukraine struggle.
Day by day Realized Volatility Over Time: Strengthened
- In step with Mazur’s findings, we discovered {that a} longer time horizon helps us scale back “cherry choosing.” As such, Bitcoin’s day by 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 day by 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 is just not 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 day by day realized and range-based realized volatility, and the gradual decline of its day by day realized volatility over time.
With mainstream adoption of Bitcoin rising alongside additional rules, the notion of its volatility will proceed to evolve. This assessment 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.