For years, people have discounted Bitcoin due to its high volatility. Bitcoin is proving that it’s going nowhere by essentially outperforming during global turmoil. With the digital asset recently surpassing its 3rd halving, it’s getting attention from Wall Street and other institutional investors. As time progresses, investors are seeing Bitcoins volatility decreasing, as it establishes itself as a “store of value asset.”
Since inception, you’ve really had two different audiences criticizing Bitcoin volatility. Investors argue that Bitcoins volatility scares away the masses, ultimately decreasing the chances of mass adoption. On the other side of the spectrum, you have merchants who argue that Bitcoin's volatility limits their ability to ever accept it as a payment protocol. This argument was valid during Bitcoins early days of existence, but recently the narrative has shifted. People are starting to understand that Bitcoin is no longer as volatile as it once was.
Many people forget that Bitcoin has only been around for 11 years. In that 11 years, Bitcoins market cap has grown to a current value of $168 billion based on simple supply vs demand economics. Unlike traditional markets, Bitcoin doesn’t have revenue or earnings per share. The infrastructure is completely different, relying on a peer to peer ecosystem to facilitate growth. Volatility in traditional assets usually stems from various financial metrics. Bitcoins volatility is more “macro” based and tends to behave based on:
Regulation - With Bitcoin still being a relatively young technology, regulation plays a big part in volatility. China for example has taken extreme measures to regulate crypto assets. Consequently, Bitcoin volatility has been elevated during these measures. Historical metrics show Bitcoin volatility being elevated in 2014 ( China directs commercial banks and payment providers to shut down bitcoin trading accounts ), 2017 ( China banning all China based exchanges and trading platforms ), and 2018 ( China cracking down on mining operations ). In addition, studies by the Dallas Fed outline that crypto markets strongly react to regulatory news.
Market Size / Maturity - Despite Bitcoin growing exponentially the last decade, it’s still a fraction of the size compared to the stock and bond markets. The stock market surpasses $70 trillion in value. The bond markets are ever larger, hovering around $100 trillion in market value. This is an important comparison, because smaller markets like Bitcoin are more prone to manipulation. We’ve already seen multiple exchanges experience “flash crashes.” Scenarios like these have created increased volatility in the digital asset space. As Bitcoin continues to grow, you will slowly start to see the space materialize and mature, which will help volatility normalize.
Bitcoin Volatility VS Other Asset Classes
For most of Bitcoins life, it experienced higher volatility than other asset classes. With Bitcoin only being 11 years old, this is a fundamental risk that any “startup” in the tech space would experience. People still argue over the future use case of Bitcoin. Some people believe it will be a “store of value - Gold 2.0” , while others see it taking over peer-to-peer payments. Regardless of the outcome, volatility will have to be much lower for this to surface. No “store of value” asset in history has had volatility as high as Bitcoin. In addition, you can’t expect Bitcoin to disrupt payments with high volatility. If you put yourself in the shoes of a business owner / merchant, it’s much easier to digest the argument. With Bitcoin only surpassing its 3rd “halving” out of 30+ future ones, it may take some time for volatility to normalize. What we do see is an environment where it’s happening. The last 2 years, Bitcoin volatility has been on a downtrend. As of recent, Bitcoin 1 year volatility is now lower than oil and emerging currencies. 2020 is really the only time in history in which BTC 1 year volatility was lower than both oil and emerging currencies at the same time.
Hitting 2 Year Low
The figure below shows Bitcoin 1 year volatility being the lowest in 2 years. Right now it hovers around 15%. Aside from Bitcoin outperforming the market during global turmoil, it’s now offering lower volatility than some of the largest sectors in the world. When COVID-19 essentially locked down the economy, we saw a liquidity shock that resulted in Bitcoin losing 50% of its value. The fact it quickly corrected and soared during global uncertainty was one of the best milestones it’s ever accomplished. During a time that oil saw negative pricing, Bitcoin's volatility was on the decline. This is the very reason that Wall Street and institutional investors have their eye on Bitcoin. As outlined in a previous article, Grayscale Investments, the largest asset manager in digital assets saw record inflow in Q1 2020. Hedge Funds across the country were taking a tactical approach during COVID-19, and allocating to primarily Bitcoin and Ethereum.
If Bitcoin volatility continues to decline, it will open up the door for more use cases on a global scale. We’re starting to see institutional investment pick up, but the market really needs a product to get the retail space involved. The Bitcoin ETF has been an on-going mission, but it’s essentially gotten nowhere. Aside from security concerns, volatility is another reason regulators are pushing back. In the future, having a product like an ETF is going to lower volatility. As discussed above, when the market size gets larger, it will reduce uncertainty ( volatility ) in the market.
In addition, you’re now seeing emerging currencies producing higher volatility than Bitcoin. This is one of the reasons why developing countries are starting to embrace Bitcoin. For years, countries have been looking for financial inclusion. With failing currencies and governments, Bitcoin is providing this “sound money” solution. Venezuela is a pure example of failing currencies. Inflation has decimated their reserve currency and Bitcoin has become a currency of choice. COVID-19 made everything much worse for developing countries compared to the U.S. We live in an environment where 1.7 billion people are “unbanked” globally, meaning they lack financial resources. Developing countries are seeing the power behind the Bitcoin infrastructure. For the first time ever, people can be their own banks in a peer-to-peer fashion. If Bitcoin volatility continues to decrease against emerging currencies, it will become an even more viable option long term.
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