Volatility: liability to change rapidly and unpredictably, especially for the worse.
Otherwise known as the Fear Index when applied to the S&P 500, volatility is defined in finance as the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. A measurement of violent price movements in a given asset, volatility correlates with and causes tectonic shifts across the Global Economy.
When investors are fearful, their actions tend to become erratic and illogical. While there is a maniacal focus on S&P 500 volatility, a powerful metric of Global Uncertainty can be measured across Foreign Exchange market volatility. Currency volatility can indicate turbulence and uncertainty in a given country or the general world economy. And sometimes the trigger can be as simple as an erratic big fish swimming in a shallow pool of liquidity; Such as in the AUDUSD and USDJPY flash crash of January 2019, following the S&P 500’s worst decline in a decade.
As a corollary for uncertainty, volatility can indicate and exacerbate financial meltdown and erode faith in an economy or asset. More importantly, such violent price moves can negatively affect the lives of millions of people and businesses within such an economy. While the 2019 flash crash in Yen and the Australian dollar was a mere 4% crash in a few minutes, such a drop can wreak havoc on the balance of the global trade economy.
Across the G10 Currencies, Volatility spiked to unprecedented highs during the 2008 Financial Crisis. Since the European Debt Crisis of 2015, G10 Currency Volatility has trended toward historic lows (despite 2016 Brexit’s best efforts). Have things gone too quiet? Or does this stability serve to calm underlying tensions, heralding a new era of optimism in the Global Economy?
Rising from the volatile ashes of 2008, however, is a fascinating new asset that regularly puts even 2008’s Volatility Crisis to shame. Bitcoin, a purported alternative to the fiat currency system, is infamous for its insane volatility.
In fact, Bitcoin’s volatility is wilder than even its most violent fiat counterparts:
Compared to a currency pair like USDCAD or USDEUR- which barely breaches 2% (10-Day) volatility even during the Great Financial Crisis- how is Bitcoin supposed to compete as an alternative to fiat currency? Bitcoin at its lowest volatility is lucky to be below 2%. Why would anyone ever attempt to use Bitcoin as an everyday currency when legacy fiat counterparts are so stable?
Volatility is a reasonable existential risk; and Bitcoin’s Achilles Heel. Defendants will claim that Bitcoin is still relatively new, and thus higher volatility is expected. The Volatility chart referenced above only counts Bitcoin trading since 2015, since beforehand trading was too illiquid, on niche exchanges. In order for Bitcoin to ever be taken seriously as a contender for a global reserve currency, there would have to be a major paradigm shift:
Either Bitcoin’s volatility would need to be suppressed, such as via institutional market makers entering the space.
Or a black swan event would have to occur; a major Volatility Event would have to spike the major world currencies.
If reserve currencies such as the Euro and Dollar move violently in the next few years, Bitcoin’s volatility may seem slightly more normal. And unless Bitcoin’s volatility dampens as its market matures, it will always have a highly logical concern about volatility.
To dig into the chart without commentary, here is the plot.ly link