The Best Way to Understand Bitcoin Volatility

B.itcoin is one of the most important economic inventions in history. For many people, this means hope and has turned believers from savvy bankers to seasoned CEOs to passionate supporters. However, due to the perceived volatility and endless geopolitical uncertainty, some people consider it unsuitable as a true store of value.

If we look at bitcoin volatility in a historical context, the following data offers a new perspective that makes a compelling case for this digital asset class. Since at least October 2014, the top tercile of Bitcoin volatility has been above 79%. To better understand these numbers, let’s divide Bitcoin volatility into high, medium, and low.

Volatility is best defined as the 30-day standard deviation of the annualized daily log returns. Against this background, the high volatility is 100% or above, the medium volatility between 50% and 100% and the low volatility below 50%. Bitcoin is currently below $ 40,000 and approaching its lows in February.

Bitcoin’s Relative Strength Index (RSI) on a daily chart has been oversold in the past few days. However, an oversold value of 25 is not as significant as the March 2020 value of 14, suggesting that selling pressures may continue in the short term. The table below provides a framework to show that BTC is merely expanding its mean volatility and aligning with other time periods.

The strongest antithesis to periods of medium to high Bitcoin volatility is the non-discretionary asymptotic monetary policy. Of course, there are at least two dimensions that make Bitcoin a unique value proposition: First, it has an integrated asymptotic supply curve with a perpetual limit of 21 million Bitcoin. Second, it exhibits an exponential demand curve largely derived from global decentralized interests and under-banked communities.

Bitcoin inflation versus time

Can Bitcoin overcome its volatility problem over time?

If Bitcoin is to become a practical store of value, its medium to high volatility must stabilize over time. As a rule, a store of value that increases in value over time (like Bitcoin) is more practical than a store of value that is depreciating in value. However, both inflation and deflation can undermine an asset’s role as a value maintenance mechanism. In this case, Microstrategy CEO Michael Saylor recently faced a difficult decision to find a place to put extra cash on the company’s balance sheet.

In his view, holding Fiat was analogous to holding a melting ice cube on a hot summer day. In other words, if he did nothing, his company’s purchasing power would slowly fade in the years to come. He says: “The consumer price index (CPI) is a misleading measure of inflation. Volatility is a misleading measure of risk. The former distracts us from the problem, while the latter distracts us from the solution. “

Michael Saylor and his corporate executives evaluated the various options to maintain his public company’s balance sheet and kept coming back to Bitcoin. “There is a monetary planet of $ 500 trillion and the outer layer is the currency. Then there are stocks, bonds, and real estate. There is $ 10 trillion worth of gold there and $ 1 trillion of bitcoin there. Bitcoin will flip gold and wrap the whole thing up Gold market Cap, ”says Saylor.

Bottom line:

It would be unreasonable to expect Bitcoin to move from virtual irrelevance to a global monetary base that competes with sovereign central banks without volatility. The medium-term Bitcoin trend is around 20% below the 100-day moving average. Volatility alone is not an argument that Bitcoin is a store of value. During Bitcoin’s relatively short lifespan, volatility has moved downward with ever increasing market capitalization and increasing market volume.

The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.



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