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Cryptocurrency

Bitcoin Volatility and Imposed Limitations

Annualized 21-day volatility of S&P 500 is 8.8% but for bitcoin it is 87.9%. U.S. dollar index volatility is 5.5% in comparison. Volatility is the main reason why bitcoin wide acceptance for payments may be a far-fetched possibility.

The chart below shows the annualized 21-day volatility of bitcoin and S&P 500. TSLA is added just for comparison.

21-day volatility (ann.) Avg. since 2017 Return since 2017
Bitcoin 87.6% 70% 3,224%
S&P 500 8.8% 14.6% 105%
TSLA 32.8% 54.6% 1,359%

Bitcoin volatility reached as high as 165% in April of last year. S&P 500 volatility peaked at around 95% during the 2020 crash.

Average 21-day annualized volatility since 2017 it at 70% for bitcoin, 14.6% for S&P 500 and 54.6% for TSLA.

Bitcoin has gained 3,224% since January 2017 while S&P 500 is up 105% on a total return basis and TSLA has risen 1,359%.

High returns come at very high risks and often an order of magnitude higher than the risks present in a benchmark index like S&P 500.

The high volatility of bitcoin places significant burden on allocations by hedge funds and institutions. In fact, many funds may have constraints on allocating to high volatility markets because, after all, a 50% loss on 2% allocation is still 100 basis points loss that can hurt performance and ratings.

At these volatility levels, bitcoin has limited acceptance as an alternative asset and it is also impossible to be used as a store of value or for payment transactions since real-time cost to consumers and payment processors may be prohibitive due to the price fluctuations. In comparison, U.S. dollar index annualized volatility is at 5.5% and the average since 1971 is 7.1%.

For bitcoin to be widely accepted as a store of value and for transactions, volatility will have to drop by an order of magnitude and match closely the volatility of the dollar index. At present conditions, this may be a far-fetched possibility.


Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

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