Is Bitcoin Really More Volatile Than Stocks?
Traditional investors have often blamed Bitcoin’s volatility, and that of other crypto assets, as the major critique of investment. But recent data has shown that many major corporations have seen even larger downtrends in stock prices this year. Rising inflation and international volatility has crushed major stock market indexes, including the S&P 500. While Bitcoin can’t be labeled a low volatility asset, its fluctuation doesn’t differ to behaviors seen in traditional markets.
Bitcoin’s and Ethereum’s drop of 60% and 66%, respectively, has drawn a lot of criticism from crypto skeptics. The sharp volatility is can be attributed to centralized yield, the insolvency of multiple crypto lending firms, and overall liquidity issues. High inflation and increasing interest rates certainly haven’t helped, but in addition to harming the crypto ecosystem, its done serious damage to the stock market — with losses that surpass 85% in 2022.
Stock Market Losses
Companies, especially those that are publicly traded, rely heavily on financing. When interest rates are increased, it has a severe impact on debt-intensive sectors such as energy and technology.
Saipem (SPM.MI), and Italy-based energy company, say its shares decline by 99.4% in 2022. Uniper (UN01.DE) is a German energy company that had to halt its Nod Stream 2 gas pipeline, forcing a 15 billion euro bailout in July 2022. Its stock has experience a 91.7% drop. Cazoo Group (CZOO) is currently worth $466 million but the car retailer was valued at $4.55 billion at the end of 2021. Its share price has dropped 90%. Carvana (CVNA), the U.S. auto retailer, has also seen an 87% decline in share price. Biotech companies I-Mab (IMAB) and Kodiak Sciences (KOD) have lost 90% of their value in 2022.
The tech sector, which relies on growth, struggled significantly as well. China-based Kingsoft Cloud Holdings (KC) suffered from a major deficit early this year, resulting in an 87.6% year-to-date (YTD) decrease. Tuya, Inc. (TUYA), and artificial intelligence (AI) company has seen a share decrease of 83.7% despite successfully raising $915 million in March. Other tech companies also saw losses upward of 80% including Cardlytics (CDLX), Bandwidth (BAND), Matterport (MTTR), and Zhihu (ZH).
S&P 500
A long-term study of Bitcoin, conducted in 2020, showed that Bitcoin exhibited lower volatility than multiple S&P 500 stocks. The study was broken down into 90-day and YTD volatility, by daily standard deviation, between Bitcoin and the S&P 500. The study found that Bitcoin exhibited lower volatility that 112 stocks in a 90-day period, and 145 stocks YTD.
More recently, Bitcoin has been trending closely with the S&P 500. At the end of Q1, the S&P ended 5.5% down — Bitcoin closed the quarter at 2% down — tightening the correlation with the S&P to nearly 0.9. The correlation is cyclical: Bitcoin’s losses will outpace the stock market’s, given its 24/7 trading. But it will also rebound faster than the S&P.
Nasdaq 100
According to price movements compiled by Bloomberg, “Bitcoin has moved more than one standard deviation from its average in either direction just five times so far this year. That compares to 12 times for the tech-heavy Nasdaq 100 index.”
Nasdaq 100 has dropped nearly 13% in 2022, surpassing Bitcoins 8% decline. Tech stocks have proved more volatile than Bitcoin, despite not trading as much as the 24/7 asset. “At its worst level, Bitcoin was down 50% while the Nasdaq 100 was down 15% at its lowest level — 50% declines have a way of wringing out a lot of leverage in an asset,” said Miller Tabak + Co.’s Matt Maley. “Since there is likely still a lot of leverage in many of the big Nasdaq 100 stocks, it makes sense that the volatility would be much higher.”
Crypto More in Sync with Stocks?
Crypto assets are no longer on the fringe of the financial system. With greater adoption, the correlation between crypto assets and traditional holdings has increased dramatically. Research by the International Monetary Fund (IMF) has shown that crypto and equity markets have become increasingly interconnected across economies over time. It finds that spillover from price volatility in Bitcoin to the global equity markets explain about 14%-18% of variation in equity price volatility.
Prior to the COVID-19 pandemic, crypto assets showed little correlation with major stock indices. They were viewed as a hedge against other asset classes and a tool to diversify risk. After the central bank crisis in early 2020, crypto prices and U.S. stocks both surged amid favorable global market conditions. The correlation coefficient of Bitcoin to the S&P between 2017 and 2019 was only 0.01. That changed dramatically from 2020–2021, when it jumped to 0.36.
Similar behavior is observed with stablecoins, such as Tether (prior to its crash earlier this year). Spillover from Tether to the global equity markets during the pandemic explained about 4%-7% of variation and volatility.
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