Bitcoin has many similarities to other investment classes such as gold, fiat currency, or other commodities as investors’ emotions drive price action. As Bitcoin’s position in the economic model is still unknown, its price is speculative and heavily dependent on investors’ perceptions of the value of the cryptocurrency at a given point in time. Bitcoin’s price is also dependent on social and legislative factors, which, in turn, create volatility.
In 2017, Bitcoin’s volatility was attributed to the lack of liquidity in the market. Additionally, in the crypto market, BTC holds the upper hand as all the market is dependent on it. As more institutions invest in Bitcoin liquidity is increasing and volatility decreasing, as per a JP Morgan report. Still, investors’ opinions play an essential role in price deviations, as news and media attention contribute to creating emotional theories. On April 18, the price of Bitcoin fell by $8,000, its largest-ever drop in terms of monetary value.
Can Bitcoin Overcome Volatility?
The authors of recent research on Bitcoin compared its extreme volatility to the acquired store of value users give to the coin. Furthermore, the authors identified that the currency’s volatility on the exchanges can be ten times higher than FX exchange rates. That prevents Bitcoin from performing some of the fundamental operations of approved currencies.
Decreased volatility acts as a catalyst for increasing institutional adoption. However, high price fluctuations indicate that Bitcoin is used as a store of value rather than a currency. Although Bitcoin’s use cases aim to facilitate faster and censorship-free P2P transactions, it can’t penetrate the global market system because of its significant discrepancies with the FX market. According to Ari Wald, Bitcoin is an atypical asset as it maintains its market trendline despite a drop of 20% in price.
Volatility has seen Bitcoin’s price plummet and undergo meaningful price changes, which are not in tune with the market. Raoul Pal, formerly of Goldman Sachs, argues that Bitcoin’s volatility is one of its main attractions as it can generate “a big upside risk-reward skew,” making it a sought-after asset. Furthermore, Bitcoin will still be exposed to volatility as its usability and fundamentals are still unknown. Unlike gold, which has proven useful to investors and users, Bitcoin is still skewed toward the obscure.
In 2021, the three-month realized volatility of Bitcoin was up to 90%, while the cryptocurrency’s price reached new all-time highs. However, price drops can be beneficial “cooling off” periods for Bitcoin, before it drives to new peaks.
Is Bitcoin Still Volatile Now?
Bitcoin’s market volatility is mainly attributable to external factors. For example, if China announces a crypto ban, the price of Bitcoin crashes. Whereas, when Elon Musk announces that he backs crypto, its price increases. Still, according to data, a level of volatility shows signs of a healthy market.
Bitcoin’s realized volatility in 2021 is 86%, while gold’s volatility barely passes 16%. While volatility is still high, it’s more constant compared to 2017. Bitcoin’s volatility is lower than in 2017, and as JP Morgan reported, a drop in volatility may increase the cryptocurrency’s appeal and interest from institutional investors. Additionally, David Grider does not believe we’ve seen a top similar to 2017, which eventually drove the price down by 80%.
On the other hand, investors who are aware of the risks associated with Bitcoin are wary of investing in an asset that can affect their portfolio.
On the Flipside
- Volatility is ever-present in any financial market, and it can be attractive for investors as they can generate more revenue from a volatile asset with a history of reaching new highs.
- Bitcoin was less volatile than the stocks of 112 of the S&P 500 on a 90-day average.
- Bitcoin’s decrease in price volatility will increase investors’ interest but will not change the appearance of BTC as a store of value.
2017 Vs. 2021
Data from Woobull offers insights into how the cryptocurrency market of 2021 differs from 2017. While some retail investors argue that Bitcoin is still volatile, they only see a single dynamic. From their perspective, Bitcoin remains highly volatile as the monthly standard deviations of Bitcoin prices can be five to seven times higher compared to what is generally observed in stock markets. However, Bitcoin’s volatility only decreases with trading volume. Its 60-day volatility has decreased from 32% at the height of 2017 to 14.25% in 2021.
Figures from the Bitcoin Volatility Index mirror the Woobull data. Between 2017 and 2021, BTC standard deviations show that spikes in Bitcoin’s price are diminishing. What’s more, data suggest that in 2021, BTC’s standard deviation over 30 days and 60 days remained constant despite the price of Bitcoin nearly doubling in 2021.
The increases in prices have been, according to some commentators, sustainable. However, in 2017, the cryptocurrency landscape was still developing, hence the high volatility spikes. Many market analysts continue to debate liquidity. However, Willy Woo has reported that Bitcoin has continued to decrease its volatility in the past three years.
The last 3 years has seen Stocks, Gold and Real Estate getting more volatile. Volatility is a sign of economic uncertainty.— Willy Woo (@woonomic) January 28, 2021
Meanwhile Bitcoin continues its trend of reducing volatility. pic.twitter.com/KtWSc7dOiS
According to Woobull, Bitcoin’s 60 day-volatility was 12.2% in January 2017 compared to a peak of 24.3% in the same month of 2021. The high volatility percentage is attributed to the bull market of 2021, where the price of Bitcoin nearly doubled. Data comparing the 30-day and 60-day standard deviation position volatility percentages between 4% and 5.65% in 2021 and 5.41% and 3.81% in 2017. The price of Bitcoin in January 2017 peaked at $1,186 and $41,414 in 2021, according to CoinMarketCap.
According to Woobull, Bitcoin’s 60 day-volatility was 8.20% in February 2017 compared to a peak of 14.6% in the same month of 2021. The price of Bitcoin in February 2017 peaked at $1,196 and $58,112 in 2021, according to CoinMarketCap. Data comparing the 30-day and 60-day standard deviation place the volatility percentages between 5.19% and 4.02% in 2017 and 6.08% and 5.08% in 2021.
According to Woobull, Bitcoin’s 60 day-volatility peaked at 13.1% in March 2017 and 16.7% in the same month in 2021. However, data suggest that volatility percentage has decreased sharply in 2021 compared to 2017. The price of Bitcoin reached a low of $908 in March 2017 and a low of $51,704 in the same month in 2021, according to CoinMarketCap. Data comparing the 30-day and 60-day standard deviation place the volatility percentages between 5.00% and 3.87% in 2017 and 4.16% and 4.89% in 2021.