This Key Bitcoin Indicator is Dropping Like a Rock

Bitcoin volatility has fallen since 2011 and compared to the U.S. dollar currently sits at about 3-4 times higher than the Japanese yen, British pound, and euro. High volatility in the digital currency space has long been cited as a reason against adoption. But, as charts and analysis demonstrate, it is very likely that Bitcoin volatility is trending downwards, even as volatility in other cryptocurrencies remain high. 

The Bitcoin industry generally highlights key indicators like price, transaction volume, bitcoin wallet numbers and trading volumes to underscore Bitcoin’s increasing popularity. All of these factors have jumped in recent years. But Bitcoin’s volatility has fallen, now sitting at approximately 5%. For comparison, gold volatility averages approximately 1.2% and major fiat currencies between 0.5% and 1.0%.

Also Read: How Bitcoin Apps Help People Survive Emerging Market Volatility

Diminishing Volatility

Bitcoin’s volatility, a measure of how much its price varies over time, has long been cited as the digital currency’s downfall. Each day, Bitcoin’s value goes up or down – and oftentimes both. Measuring volatility is important to judging an asset’s overall risk profile. High volatility is cited as to why sophisticated investors and the mainstream public stay away from Bitcoin. 

This Key Bitcoin Indicator is Dropping Like a Rock
Bitcoin analyst WooBull expects Bitcoin to match fiat currency volatility by summer 2019.

Investors generally limit exposure to volatile assets by not holding them or hedging. Hedging Bitcoin is tough due to a dearth of options to short Bitcoin. Further, the more volatile an asset, the more expensive it is to hedge. 

There are external factors which could contribute to currency-pair volatility like fiscal policy, geopolitical disruption and other factors. Bitcoin volatility could also be a function of transaction volume, as some suggest.

A paper published in 2014 by University of Victoria researchers examined the relationship between Bitcoin volatility and Google searches is implied. “Changes in Google Trends have an effect on the realized volatility of Bitcoin,” according to the paper. According to the paper, changes in the volatility of Bitcoin also have an effect on Google searches for Bitcoin.

“An increase in Google Trends has a positive impact on volatility, and an increase in volatility has a positive impact on Google Trends,” states the research team, led by Darryl C. Davies. In the past year, this has proven untrue, as an increase in Bitcoin search queries has paralleled a decrease in volatility. 

This Key Bitcoin Indicator is Dropping Like a Rock

An end to zero fee futures trading in China has led some to speculate Bitcoin volatility will decrease in the coming months and years. When the change was announced, Bitcoin trading volume crashed 90%. In fact, most volatility so far in 2017 is credited to actions and statements by the Chinese government. Bitcoin.com reported earlier this year that monied investors in China are leaving their money in the digital currency.

“We are starting to see a lot of smart money enter into the space and stay there,, ” said Ryan Rabaglia, Head Trader for Octagon Strategy, a Commodity and Digital Asset Trading firm based in Hong Kong. “In the form of small to medium sized institutions taking much larger positions in [bitcoin] and a natural progression to larger ones is sure to follow. With all the uncertainties surrounding us in traditional product spaces, alternatives are being sought, and although this space is still foreign to most, it’s not preventing the capital inflows we’re seeing.”

All Time Highs Amid Low in Volatility

The number of Bitcoin transactions has skyrocketed throughout the digital currency’s lifespan, as has the price, which currently sits near an all-time high after crossing the $1,000 threshold twice so far in 2017. The number of bitcoin wallets at popular multi-service provider Blockchain.info has increased, as well, in the past eight years. Trading volumes are also at all-time highs. Yet, over time, Bitcoin price volatility has declined. 

What do you think about Bitcoin volatility? Let us know in the comments below. 


Images via Shutterstock, Woobull, Google


Do you want to talk about bitcoin in a comfortable (and censorship-free) environment? Check out the Bitcoin.com Forums — all the big players in Bitcoin have posted there, and we welcome all opinions.

  • Brandon Kelly

    The dollar will pass bitcoin in volatility inside 18 months.

  • Daniel Alexandre

    I wonder how exactly is the volatility of anything with a market price measured. I suppose 0% volatility would mean that the price would keep the same against the price of something else that we will need to use as a reference in a given time interval and that 100% would mean that the time interval was extended enough to make the extension of time intervals where the price of it against the used reference was the same was infinitely less extense than the extension of the time intervals where they had different price.
    I but guess I need serious help in understanding how exactly the volatility of things like bitcoin and gold (taking into account their averaged market prices) is measured. Can anyone explain, please?

    • Matt Prime

      This is a great comment, I guess I also need a serious help in understanding how exactly is volatility measured.

      • Tracer289

        Check out my comment above for one way to measure volatility.

    • Tracer289

      In my simple mind we would divide the change in price by the price. The extremes would be 1 and an infinitesimally small decimal. Over the last 24 hrs the price swung $34. Divide $34 by $1041=.0326. If you prefer to deal with percentages than multiply by 100. 3.26%.

      This does not account for the volatility in the benchmark, in this case the U.S. dollar.
      So lets do the same exercise with Yuan. Over the last 24hrs the price has gone from 7240 to 7500 Yuan.
      So the price difference is 260 Yuan 260/7370=.0352 or in percentages 3.52%

      If the Bitcoin price is $1000 and it fluctuated $1000 over the last 24 hours then 1000/1000=1. or 100%

      So a volatility of 1 if super high. A volatility of .00000001 is nothing.

      This is just my method of calculating volatility for myself. There might be a standard method used in the finance industry. I dont know.
      Keep in mind different exchanges report different prices. I also put the average of the high and low in the denominator. Thats just what makes sense to me.

      I dunno if the methodology really matters as long as you apply your method consistently so that you can compare the volatility moving forward against past calculations.

      • Daniel Alexandre

        Thanks, it is making much more sense, now.

  • Sure Thing

    The new world currency. By the people for the people.

    • The Real Stig

      A currency shouldn’t require a fee to be paid every time you transact with it, nor should the time it takes to complete a transaction be hugely variable and based on a fee.

      • Tracer289

        That’s the beauty of competing currencies. You are welcome to use gold, wampum, tobacco leaves, federal reserve notes, or whatever you prefer.
        I am perfectly satisfied with Bitcoins attributes as I recognize there are no free lunches.

        Next time you want to send federal reserve notes or gold to China, tell the delivery boy (banks, western union, your mom) you don’t think you should have to pay him to deliver your money for you.

        Next time you want to invest in bonds, you can use Ameritrade for cheap or you can call your broker with his HFT algos and pay for the instance front-running access.

        • The Real Stig

          I have dabbled with Bitcoin for a bit of fun. Still have several, but BTC has some massive problems.

          The principal of these is the insane amount of energy required to mine blocks, which is only getting progressively worse. It is clearly unsustainable. The CO2 gasses generated are excessive.

          I actually was quite keen on Bitcoin. I thought it might be a way to reduce the costs involved in currency conversions when transferring money internationally. Unfortunately it turns out to be way more expensive than traditional options available to me. Using bitcoin you are looking at over 1-2% in fees, the latter being more likely, vs 0.25% through conventional means. It would be slightly better than going through banks, but that’s a mugs game anyway.

          Despite my avatar, you seem to think I am in the fascist US. Luckily that isn’t the case.

          Bitcoin is almost entirely dependent on the whims and good graces of the Chinese government and could have it’s plug pulled – literally – on a whim. No other commodity is as ludicrously vulnerable. Bitcoin looks like the new Tulip to me – all the rage and very fashionable.

          It’s good fun at the moment. I am sitting on a nice little profit, but it’s costs and technical problems make it completely unfeasible as a widely use currency.

          • Tracer289

            I do not recognize your Avatar. Where is it from?
            Have you ever learned about how much energy is required to produce paper money or to mine for gold? Are ASICs becoming more efficient?
            China doesnt even account for 1/3 of daily volume now that free trading has been ended. You can verify ts for yourself over at bitcoinity.

            Your opinions seem uninformed if not outright trollery to me. But that is just my opinion. Time will tell.

          • Richard Toddar

            As ASICs become more efficient the difficulty hash rate tends to increase as well. Still, Bitcoin mining thrives in areas where electricity is either renewable or governments subsidize it creating an electricity arbitrage situation. You are correct that anyone who criticizes Bitcoin’s resource consumption tend not to compare to the waste generated by fiat (how many employees, buildings, vehicles, equipment, and utilities are used on a daily basis to exchange USD?). Unless there’s an accurate way to compare the two, the point is moot.

          • Black Pirate

            “Bitcoin mining thrives in areas where electricity is either renewable or governments subsidize it creating an electricity ”

            Those are the countries that are suppressed the most.

            Kudos for them realizing that the electricity has higher value then their diminishing currency.

            Using socialism against it self is a smart way to bankrupt them vs civil war.

            Those countries eather ban western money or give them low rates in conversion. Electricity is the only way for them to get western money to pay for their way.

          • The Real Stig

            My avatar is the UK RAF Roundel.

            The only sensible fiat currency is the polymer notes Australia, New Zealand and Canada use. I don’t know how much energy is required to produce them but I do know they have a very long lifespan. I suspect that if you took their energy cost to manufacture and divided by the number of transactions those notes accomplish over their lifespan, the net energy cost per transaction would be so close to zero as makes no difference.

            You are being completely disingenuous about China. It is only because of the extraordinary freeze in the Chinese exchanges that you can even say that. If you took a look at bitconwisdom two weeks ago, you would have seen that the number of bitcoins transacted in a day was in the millions. In Europe it would have been in the single digit thousands. Most of the mining hash power is in China – that is the problematic issue. The Chinese government could close them all down on a whim.

            Bitcoin transactions currently have the entire network at or beyond it’s capacity to handle and the costs per transaction are going up steeply as well as the delays in completing transactions.
            The notion that bitcoin could replace fiat is utterly delusional. The system can’t scale. Someone on Reddit did a rough calculation of the energy consumption of the US banking system and reckoned that BTC consumed about 30% as much, which is staggering when you consider the value of BTC is only 1% of what the banks handle.

            Given the number of fiat transactions daily, world wide, Cryptocurrency would consume several times more energy than the world can generate currently, I would imagine.

            Crypto based currency simply can not replace fiat. It is no more possible than interstellar travel as both require far more energy than is practicable to produce or supply.

            I walked into a shop today, and bought something with fiat cash. the cost of the transaction to me was 0 and the time to process the transaction was 10 sec. if I had tried to do that with BTC, I would still be standing at the counter. Given my experience with a bitcoin transaction last weekend, I would have needed to bring a sleeping bag, change of clothes, a foam mat and a lot of fiat for meals as my last transaction took more than 48hrs to go through.

            The naive idealists who say crypto can, should, will replace fiat are so ignorant of the real world as to make one wonder if they have ever lived in it.

            If you believe in global warming, then you should be adamantly opposed to replacing fiat with crypto.

            Having a difference of opinion and debating an issue is not ‘trollery’.

          • Tracer289

            Thank you for the response.
            For now we must agree to disagree as I do not care to take the time to further rebut your points/misinterpretations/misconceptions.

            I do not concede anything but I don’t believe it’s worth the time and energy to debate this further.

            Time will tell.

            PS The RAF… they fly kites correct? ;p #USAirForce

          • Black Pirate

            Yes it does takes energy to mine, but in winter or colder climates it also means free heat. Its snowing outside, yet my garage is 86F. My cost of mining covers electricity, but the cost of saving on heat is my profit.

  • Tracer289

    I thought this was an excellent article.

    However I take umbrance with one line. Mr. Connell says “Investors generally limit exposure to volatile assets by not holding them or hedging. Hedging Bitcoin is tough due to a dearth of options to short Bitcoin.”

    It is my opinion that the lack of shorting options creates a more honest market and prevents excessive speculation. One either buys bitcoin or doesn’t.
    Shorting is a form of gambling that to my knowledge reflects the current casino model of Wall Street than necessary liquidity provided by speculators.

    Bitcoin is money, not a stock.
    Furthermore look at what the futures paper market (300 contracts for every one ounce of gold available and futures contracts are NEVER settled in gold) does to the gold price. Volatility may be low but the price is also “fixed”.