Volatility is a particular subject in the world of finance. And all the more so in that of cryptocurrencies. Indeed, volatility can be analyzed from two angles. On the one hand, it makes it possible to measure the probable variations of an asset, and in certain cases, to anticipate its movements. On the other hand, the overall volatility of the assets makes it possible to see which assets actually profit from periods of tension. In this article, we will base ourselves on an approach to historical volatility.
Historical volatility of bitcoin (BTC)
The study of volatility makes it possible to highlight mechanics, paradoxes, oppositions or complementarities between assets. The case of bitcoin is quite unique. Both by the intensity of bitcoin’s volatility, but also by the predictive capacity of volatility.
A peculiar behavior
A previous article had already led us to discuss the volatility of bitcoin. In addition, volatility measures the instability of changes in the price of an asset. Bitcoin has a very unique behavior in the face of volatility, and we highlighted the following conclusions.
“We generally observe that the volatility of bitcoin increases during the phases of the increase in the price of bitcoin. Conversely, falling bitcoin price most often results in lower volatility. In other words, it means that bitcoin’s extreme swings are greater during market ups. »
Bitcoin (BTC): An “abnormal” statistical pattern? – Tremplin.io
Indeed, as the following graph shows, we observe a downward trend in the bitcoin volatility rate (BTC). Thus, in 2018, the annualized volatility of bitcoin (BTC) was close to 90%. In 2023, this volatility is around 65%. That is a drop of more than 26 volatility points in just 5 years… This drop in volatility also reflects the fact, correlatively to the observation cited, that the bullish (and bearish) performance of each new bitcoin cycle is weaker.
This also amounts to saying that bitcoin, in the space of 5 years, has lost in volatility the equivalent of the volatility of the CAC40!
The graph below shows the evolution of the price of bitcoin (BTC, dotted). Similarly, we added (in blue, continuous curve, right axis), the annualized volatility of bitcoin from monthly price data. The red trendline gives us the long-term trajectory of bitcoin volatility. We again observe the complexity of the relationship between bitcoin and its volatility.
- In the long term, the correlation between the price of bitcoin and its volatility is negative (-25%). Put simply, a decrease in long-term volatility more or less translates into an increase in the price of bitcoin.
- Over one year, the average correlation between the price of bitcoin and its volatility is positive (+28%). That is to say, an increase in volatility reflects more or less, in the short or medium term, an increase in the price of bitcoin.
These statistical observations can be found graphically. Indeed, we see that trends in the price of bitcoin are often linked to symmetrical movements in volatility. Even the major low seen in November 2022 was accompanied by a historic low in volatility!
A strong recent increase in the link between volatility and bitcoin!
We showed that the average one-year correlation between volatility and bitcoin is +28%. But the correlation rate evolves in an extreme way between the two variables. That is to say, bitcoin experiences a succession of periods of strong correlations with its volatility (more than 80% correlation sometimes), then periods of weak correlations (sometimes negative). In May 2023, the 1-year correlation between the price of bitcoin and its volatility is +53%. This correlation exceeded +70% at the end of 2022, and had reached as far as negative -30% in February 2022!
The interesting note comes in noting periods of negative correlation between volatility and bitcoin price. Thus, September 2018, September 2020, and more partially February/March 2022, were negative extremes of correlation between the price of bitcoin and its volatility. Each of the correlation deficits between bitcoin and its volatility marked, many months in advance, the low point of the market and/or the beginning of a strong uptrend. This observation is therefore important, but it can be refined.
Moreover, the same logic can be applied to the excesses of positive correlation. So March 2019, March 2020, July 2021 and November 2022 were extremes. Apart from July 2021 (which is a relative low point), each of these extremes exactly described the absolute lows of the market! This observation therefore seems more relevant to us. In any case, it is notable that we have witnessed a strong resurgence of the bitcoin / volatility link since 2020.
Bitcoin driven by index volatility?
Once we have analyzed bitcoin’s own behavior, it is interesting to notice its relationships with other assets. We know that the correlation rate between bitcoin and stock market indices is particularly high. It sometimes exceeds +80%. Nevertheless, the deeper question that is raised relates to the character ” refuge “ bitcoin. Indeed, the challenge is to know if the occurrence of crises on the traditional markets can benefit bitcoin.
A strong mechanism with index volatility
The chart below shows the historical annualized volatility of the S&P 500 (continuous curve in blue). The latter is calculated from monthly data. This may explain an amplification of volatility calculated in the short term. We then added the bitcoin price (BTC, dotted black curve).
The major conclusion is that the highs in the price of bitcoin are synchronized with a low in the volatility of the indices. In addition, we had already stated as early as 2020 the idea that bull markets usually start with maximum index volatility. This proposition seems once again to make sense here. The chart thus clearly shows that volatility minima are negative signals for bitcoin.
The statistics support these observations. Between 2017 and 2023, the correlation rate between the volatility of the S&P 500 and the price of bitcoin is +23%. This is sufficient but not necessary to affirm the existence of a strong link between the two variables.
But again, the study becomes more interesting in the medium and short term. The 1-year correlation between the volatility of the S&P 500 and bitcoin is on average -16%. It even goes down to -90% as in December 2022! Again, we have an interesting relationship.
Extreme behavior in the face of index volatility?
We have shown that bitcoin highs are synchronous with volatility lows. But it also turns out that the lowest bitcoin prices are synchronized with a maximum (opposite) correlation with the volatility of the indices! That is, market lows take effect in the opposite direction to market volatility. A peak in volatility on the indices will indeed be likely, over a few months, to reflect a minimum in the price of bitcoin.
It is quite astounding to what extent bitcoin opposes, or joins, movements in index volatility. Finally, one could also try to argue that bear markets in bitcoin are generally symmetrical to a decorrelation with the volatility of the S&P 500.
Therefore, periods of high correlation between S&P 500 volatility and bitcoin are usually seen at market highs. Nevertheless, it seems clear that an increase in index volatility benefits bitcoin in the long term. This does not necessarily mean that an environment of uncertainty is favorable for bitcoin. Indeed, in the short and medium term, an increase in index volatility can be a source of major declines in bitcoin.
The link we have described is complex. But it is precise enough to be relevant. The comparison of bitcoin with the volatility of the indices makes it possible to estimate both the highs and the lows of the market.
Ultimately, we studied the role of volatility on bitcoin (BTC). On the one hand, volatility specific to bitcoin (BTC) shows counterintuitive but powerful conclusions. Indeed, the rise of bitcoin in the long term generally results in the reduction of its volatility. Bitcoin thrives on decreasing long-term volatility. Then, over a few months, bitcoin, on the contrary, feeds on an increase in volatility to increase its performance. A drop in volatility will more often immediately translate into a drop in the price of bitcoin. Furthermore, the volatility/bitcoin link has become increasingly relevant since 2020.
On the other hand, we have shown that a minimum in the volatility of stock market indices often reflects a maximum in the price of bitcoin. Conversely, the rise in bitcoin over the long term will more often be positively correlated with the rise in index volatility. But at the same time, increases in index volatility over a few months can be a source of bitcoin declines. Bitcoin therefore does not protect against “shocks” or some “panics”. On the other hand, it benefits from the growing instability of the long-term indices, which is not negligible.
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