Has Bitcoin become less volatile with global acceptance? Bitcoin is one of the few “physical assets” with no significant income flow on the market today. This makes it difficult to value. Even junior analysts can calculate the “fair value” of an asset, which can be stripped from cash flow and receive a certain return at the end of life. Bitcoin has no cash flow and no “end of life”, let alone an identifiable value.
However, Bitcoin has three characteristics that might ensure a rising value. First, the characteristics and algorithms of decentralization. The algorithm ensures that the currency value cannot be artificially manipulated by making a large number of Bitcoin. Second, the reward halving mechanism. Bitcoin’s minning is at a certain rate of continuous decay. Or every 210000 blocks mined, the reward halves for a period of four years. Third, the total amount is limited and the total number of Bitcoin is permanently limited to 21 million. Which makes it highly scarce and irreplaceable.
Therefore, since its inception, Bitcoin has created a miracle of world investment history. Bitcoin, from 2009, has appreciated more than 50 thousand times in ten years. Its frenzied degree is far more than the tulip bubble. So, is Bitcoin a holy fruit or a forbidden fruit?
Since volatility is an important factor affecting the value of cryptocurrency investments, in this paper, we will focus on analyzing the volatility of Bitcoin and try to glimpse the future of cryptocurrency investment from trends over a decade.
Bitcoin was as volatile as ever
30-day realized volatility
Calculate the volatility of Bitcoin by the following formula:
Realized Volatility=stdloPi loPi-1 rolling 30 days*365
From November 2020 to the present, Bitcoin’s one-month realized volatility has fluctuated between 0.2 and 0.5. But compared with history, with the increase in trading volume, Bitcoin’s volatility has not shown a significant downward trend.
However, since 2018, the gap between Bitcoin’s volatility and S&P 500’s volatility has narrowed compared to that of 2017, and the volatility trend has been more consistent.
As for the pattern of the Bitcoin volatility cycle, in the first two years, the Bitcoin volatility cycle was shorter and lasted less than 50 days. Since 2020, the volatility cycle of Bitcoin has extended.
In conclusion, the price of Bitcoin has no obvious trend towards being less volatile, except for showing a slightly longer volatility period. It probably takes longer for Bitcoin to achieve long-term low volatility.
Days that have exceeded 2 standard deviations in different years
Calculate the number of days which swung more than two deviations from its average price on the rolling base and compare the situation of 30 days and 60 days.
As shown above, there is no significant difference in the number of days Bitcoin swung more than two deviations from its rolling average from 2015 to 2021, except for a bit low in 2018.
A recent report by investment management firm ARK Invest noted that one of Bitcoin’s main strengths is its volatility. Many investors have been refusing to invest in Bitcoin due to its volatility, but in fact volatility highlights its uniqueness. While sharp fluctuations in the market can cause prices to fall sharply in a short period of time, this also ensures that the price movement of an asset is not limited to long periods of consolidation and lateral movement, the data shows that Bitcoin’s 1-year actual volatility is still quite high compared to traditional assets.
Therefore, perhaps we cannot simply regard the volatility of Bitcoin as an obstacle to cryptocurrency investment, but should regard the volatility as a significant feature of Bitcoin and try to take advantage of it.
Reasons for volatility
Prioritization should focus on the fact that Bitcoin is still in the early stage of development, so it is still in the stage of price discovery. Compared with mature assets such as stocks, the market acceptance of Bitcoin is still insufficient.
Politics and regulatory policies
Political turmoil and economic crises often lead to increased public acceptance of cryptocurrencies. Due to its bank-free trading methods and high-yield future investment prospects. As a result people will become more dependent on cryptocurrencies during periods of financial turmoil.
In addition, government policies and regulations will have a direct impact on the price of Bitcoin. Due to investor concerns, harsh sanctions and measures in the past had a negative impact on the price of Bitcoin. For example, China’s crackdown on Bitcoin in 2017 led to a sharp drop in the price of Bitcoin. And in 2021, China’s total ban on virtual currency mining once again caused price turmoil in the crypto market.
Investors still lack understanding of Bitcoin investment. Bitcoin trading also lacks the constraints of rules, so the transaction is currently highly speculative. Investors bet on rising or falling prices. These speculative bets lead to sudden influx or exit, resulting in high volatility.
Limited supply and decentralization
Since Bitcoin’s supply is limited to 21 million and there is no central authority to regulate it, its price is determined entirely by supply and demand. Therefore, the cryptocurrency market volatility is easier to increase when some investors buy or sell cryptocurrencies in large volume at once.
Although the Bitcoin market has made remarkable progress, it is undeniable that its market acceptance and development maturity are far from enough to support it to become a price-stable asset. Statistically we can also verify this theory – Bitcoin has not achieved reduced volatility over the past few years. We may be able to foresee that in the future, with wider market recognition, Bitcoin is expected to maintain low volatility under the soaring trading volume. By then, cryptocurrency investments can play their ideal value.