Bitcoin volatility going down, stability going up

The volatility of bitcoin “has sunk to its lowest for nearly two years, with price swings falling lower than increasingly edgy U.S. stocks for more than two weeks in a row,” Reuters reports.

Extreme volatility has been one of the biggest — perhaps the biggest — obstacles to the development of bitcoin’s crypto-economy. Reuters explains:

“Volatility has been a major characteristic of the digital currency, which turned 10-years-old last week, throwing up major hurdles to its emergence as a mainstream asset class.
Most mainstream institutional investors, sceptical about its ability to store value in any predictable way, have also stayed clear. At the same time, regulators across the globe have emphasised price instability when issuing warnings to retail investors dabbling in the cryptocurrency.
Volatility has also prevented the spread of bitcoin as a method of payments, its intended purpose.”

In fact, volatility — the wild and unpredictable price swings that have characterized the price of bitcoin so far — scares away the vast majority of investors. Not only “mainstream institutional investors,” but also small investors who can’t take the risk of losing their money.

Some speculators try and profit from volatility: The price swings go both ways, and it’s possible to buy low today and sell much higher next week. This is too risky for most people, but some speculators make a living this way.

Another class of investors includes those who buy and hold bitcoin for years, hoping to profit from long-term trends that seem encouraging so far. In 2013, the price of bitcoin went upward of $1,000 for the first time in a rapid spike. Then it went down by 80 percent and remained in the low hundreds of dollars for some years.

Then came the 2017 spike, followed by the 2018 fall. But even those who purchased bitcoin at the top of the 2013 spike can sell at a 500 percent profit now.

History seems to indicate that the evolution of bitcoin price is fractal (chaotic but self-similar on different timescales), and mostly determined by large upward spikes and less dramatic subsequent falls. This seems to indicate that those who purchased bitcoin at almost $20,000 in late 2017 might be able to sell at a good profit in a few years.

But apart from these two categories of traders — aggressive speculators and buy-and-holders — bitcoin remains too volatile for the majority of the population. This limits the user base and also makes bitcoin less usable as a currency.

However, it appears that the wilder price swings of bitcoin might be smoothing out, and extreme volatility might soon become a thing of the past.

Recent research suggests that key statistical features of bitcoin price fluctuations, such as power laws and fractal dimensions, are now similar to those of mature, established financial markets like the stock, dollar, oil or bond markets.

In fact, the emerging similarity between the bitcoin and stock markets is highlighted by recent market data, which indicate that the volatility of bitcoin is trending toward the (much lower so far) volatility of stocks.

A few days ago Bloomberg Markets reported that “less than a year after bitcoin whipsawed Wall Street with extreme price swings, the cryptocurrency is now less volatile than the S&P 500 Index.”

“Ten-day historical volatility for the U.S. equity benchmark is hovering around 27. That compares with 15.7 for Bitcoin, data compiled by Bloomberg show.”

If this trend continues bitcoin (and plausibly other cryptocurrencies as well) might become more appealing to both institutional and small investors, and more usable as a currency.

Cover picture from pxhere, chart from Bloomberg Markets.