By this stage, pretty much everyone knows that bitcoin’s volatility is well above that of equity markets. This is still true, even after the ructions of March.
What is less well-known is that the balance of power when it comes to volatility is shifting. Market data indicates that bitcoin markets are becoming less volatile, and equity markets more so. This seems to be unrelated to the crash in markets earlier this year.
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Of course, it’s possible that this trend turns again. On the other hand, it could point to a broadening interest in bitcoin as an investment asset, as well as a new role for the cryptocurrency in portfolios.
Let’s look at the details.
It’s all relative
First, bitcoin’s volatility is currently below its 2019 average. Not so for the equity markets.
(Note: We calculate volatility by annualizing 30-day standard deviations. This smooths variations while still reflecting short-term trends and, as of mid-April, removes the effects of the March crash.)
Over the past month, BTC volatility has continued trending down, while S&P volatility has levelled off.
This could be a short-term anomaly. Or it could mean that the “standard” expected S&P 500 volatility is now at higher levels than before, while bitcoin’s is lower.
The VIX index, which measures expected S&P 500 volatility using options prices, is currently almost three times higher than at the beginning of the year.
Second, this shift is supported by activity in traditional market volatility instruments. Earlier this month, the Wall Street Journal reported on data from Cboe Global Markets data that showed more than a trillion dollars’ worth of derivatives tied to the VIX has traded this year, more than four times the figure a decade ago. It also cited figures from industry tracker Hedge Fund Research that points to a record $19.4 billion of assets in hedge funds that trade volatility.
And earlier this week, the iPath Series B S&P 500 VIX Short-Term Futures exchange-traded notes (VXX) – the largest volatility ETN by far – had its second-largest daily inflow ever.
It doesn’t matter any more
When Fidelity Digital Assets released its survey earlier this month, in which institutional investors were asked about the barriers to investment in crypto assets, volatility was top of the list.
With the narrowing of the differential, that barrier could disappear, or at least significantly diminish. It’s not just that bitcoin’s volatility seems to be trending down – if volatility overall is more acceptable, bitcoin’s swings could be seen as less of a…