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Volatility is a particular subject in the world of finance. And even more so for cryptocurrencies. In fact, volatility can be analyzed from two angles. On the one hand, it is possible to measure the probable variations of an asset, and in some cases, to anticipate its movements. On the other hand, due to the total volatility of the assets it is 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)
By studying volatility it is possible to draw attention to mechanics, paradoxes, oppositions or complementarities between assets. The case of bitcoin is quite unique. According to the intensity of bitcoin volatility, but also by the predictive ability of volatility.
His strange behavior
A previous article already brought us to discuss the volatility of bitcoin. In addition, volatility measures the volatility of changes in an asset’s price. Bitcoin has a very unique behavior in the face of volatility, and we highlighted the following conclusions.
“We generally notice that bitcoin volatility will increase during the phases of the bitcoin price rise. Conversely, a falling bitcoin price often results in lower volatility. In other words, it means that Bitcoin’s extreme swings are greater during market upswings. »
Bitcoin (BTC): An “unusual” statistical pattern? – Contribution
Indeed, as the following graph shows, we notice downward trend in bitcoin volatility rate (BTC). Thus, in 2018, the annual volatility of bitcoin (BTC) was close to 90%. In 2023, this volatility is around 65%. That is a drop of more than 26 points of volatility in just 5 years… This drop in volatility also reflects the fact, relative to the stated opinion, that the bullish (and bearish) performance of each new bitcoin cycle is weaker.
This is also equivalent to saying that bitcoin, in the space of 5 years, has lost in volatility equal to the volatility of the CAC40!
The graph below shows the evolution of bitcoin price (BTC, dotted). Similarly, we added (in a blue curve, continuous, in the right axis), annual bitcoin volatility from monthly price data. The red trend gives us the long-term trajectory of bitcoin volatility. Let’s look again at the complexity of the relationship between bitcoin and its volatility.
- In the long term, the correlation between bitcoin price and its volatility is negative (-25%). Simply put, a decrease in long-term volatility more or less equates to an increase in bitcoin price.
- Over one year, the average correlation between bitcoin price and its volatility is positive (+28%). That is, an increase in volatility more or less, in the short or medium term, indicates an increase in the price of bitcoin.
These statistical observations can be obtained graphically. In fact, we see that trends in bitcoin price are often tied to symmetrical movements in volatility. Even the major low seen in November 2022 was accompanied by a historic low in volatility!
A recent strong 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 varies greatly between the two variables. That is, bitcoin experiences a succession of periods of strong correlation with its volatility (sometimes more than 80% correlation), then periods of weak correlation (sometimes negative). In May 2023, the 1-year correlation between bitcoin price and its volatility is +53%. This correlation exceeded +70% at the end of 2022, and was negative -30% in February 2022!
The interesting note comes during periods of noticing a negative correlation between volatility and bitcoin price. Thus, September 2018, September 2020, and more in part February/March 2022, were extreme conditions of negative correlation between the price of bitcoin and its volatility. All of the correlation deficits between bitcoin and its marked volatility, many months in advance, the low point of the market and / or the beginning of a strong upward trend. This observation is therefore important, but it can be refined.
Moreover, the same logic can be applied to the excesses of a positive correlation. So March 2019, March 2020, July 2021 and November 2022 were extreme conditions. With the exception of July 2021 (which is a relative low point), each of these extremes accurately described market lows! This opinion therefore seems more relevant to us. In any case, it is remarkable that we have seen a strong revival of the bitcoin / volatility link since 2020.
Bitcoin driven by index volatility?
As soon as we analyze the behavior of bitcoin itself, it is interesting to note its relationship with other assets. We know that the correlation rate between bitcoin and stock market indices is particularly high. Sometimes more than +80%. However, the deeper question raised is about character “asylum” bitcoin. In fact, the challenge is to know if the occurrence of crises on the traditional markets can benefit bitcoin.
Robust mechanism with index volatility
The chart below shows the historical annual volatility of the S&P 500 (continuous curve in blue). The latter is calculated from monthly data. This could explain the amplification of volatility calculated in the short term. We then added the bitcoin price (BTC, black dotted curve).
The big conclusion is that the highs in the price of bitcoin are synchronized with lows in the volatility of the indices. Furthermore, we had already mentioned the idea as early as 2020 bull markets usually begin with maximum index volatility. This proposition again seems to make sense here. The chart therefore clearly shows that minimal volatility is a negative signal 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 confirm that there is 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 averages -16%. It even goes down to -90% as of December 2022! Again, we have an interesting relationship.
Extreme behavior in the face of index volatility?
We have shown that bitcoin highs are synonymous with volatility lows. But it also happens that the minimum points in the price of bitcoin are synchronized with a maximum (opposite) correlation with the volatility of the indices! In other words, market bottoms have an opposite effect on market volatility. Peak volatility on the indices is likely to indicate, over a few months, a low in the price of bitcoin.
The extent to which bitcoin resists, or binds to, movements in index volatility is remarkable. Finally, one could also try to argue that bear markets in bitcoin are generally symmetrical with decoration to the volatility of the S&P 500.
Therefore, periods of high correlation between the volatility of the S&P 500 and bitcoin tend to be seen at market highs. However, 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. In fact, in the short and medium term, an increase in index volatility can be a source of large decreases in bitcoin.
The connection we have described is complex. But it is precise enough to be relevant. The comparison between bitcoin and the volatility of the indices allows the highs and lows of the market to be evaluated.
Finally, we studied the role of volatility on bitcoin (BTC). On the one hand, volatility specific to bitcoin (BTC) shows counterintuitive but powerful conclusions. In fact, the rise of bitcoin in the long term generally leads to a decrease in its volatility. Bitcoin succeeds in reducing long-term volatility. Then, over a few months, bitcoin, on the contrary, sustains an increase in volatility to increase its performance. A drop in volatility will often cause the price of bitcoin to drop on the spot. Furthermore, the volatility/bitcoin link is becoming more relevant since 2020.
On the other hand, we have shown that a minimum in the volatility of stock market indices often represents a maximum in the price of bitcoin. Conversely, the rise in bitcoin over the long term will 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. So Bitcoin does not protect against “shocks” or some “panic”. On the other hand, it benefits from the increasing instability of the long-term indices, which is not negligible.
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Author of several books, economic and financial editor of various sites, over many years I developed a real passion for the analysis and study of markets and the economy.