By Alan Zhang
Updated on March 15, 2019, 19:30 PM

Bitcoin Volatility Continues to Plummet


Bitcoin volatility has been in a downward trend again since its steep climb in October 2018. As of March 12, 2019, the 20-day volatility of Bitcoin is 2.37%, approaching the 1.91% volatility of the Shanghai Stock Exchange (SSE) Index, which is in full swing with recent price rises. 


This is not the first time Bitcoin volatility has approached that of the traditional market. In a previous article, we noted that Bitcoin volatility has continued to drop over the past year. 


To this end, we compared the 20-day volatility of both the global mainstream stock market (including Nasdaq, Dow Jones Index, SSE Index, Hang Seng Index, Nikkei 225, Der DAX, Financial Times Stock Exchange, FCHI) and that of Bitcoin from January 2016 to March 12, 2019, and found that:

1. Despite varying volatility in different mainstream markets, most of the markets are in the range of 0.3% to 3.5%, relatively close to each other. Bitcoin’s volatility is somewhere between 0.5% and 10%. The median and average volatility of the mainstream market is generally between 0.5% and 1%, while the median and average volatilities of Bitcoin are 3.10% and 3.47%, respectively.


2. Before 2018, Bitcoin volatility had oscillated upwards in general. Since the start of 2018, we have seen the reverse. In early November 2018, Bitcoin volatility was even lower than the mainstream stock markets such as the SSE Index, Nasdaq, Dow Jones and Nikkei 225.

There are several reasons for the continued drop in Bitcoin’s volatility:

1. The price is back to a reasonable state. After the irrational boom of Bitcoin in 2017, the price has dropped by more than 80% from its highest point. The plunging market has gradually restored investors’ rationality, therefore, volatility dropped correspondingly.

2.  Increase in derivatives. At the end of 2017, both Chicago Mercantile Exchange (CME) and Chicago Options Exchange (Cboe) launched Bitcoin futures contracts. The continued increase in derivatives and the perfection of hedging tools have brought more professional investors and more liquidity to the digital currency market. This is an important factor in the decline in volatility.

3. The composition of investors has changed. In 2017, retail investors were the main participants in the market, but since then, professional investment institutions have deepened their research and understanding of Bitcoin. Their trading logic is more mature than retail investors, and is less easily affected by emotional factors.

Looking ahead to 2019, though, it’s still open to question whether the price will continue to fall, and whether the trend of derivatives growth and professional institutions will last. In terms of derivatives, Intercontinental Exchange (ICE) is preparing for the futures exchange BAKKT, which will support the spot delivery of BTC futures contracts, pending approval by the CFTC. Deribit, an exchange from the Netherlands, has launched Bitcoin options. In terms of traditional investment institutions, news came in February that two pension funds in Virginia will invest in digital currencies. This is a sign that traditional institutions see the bear market as a good opportunity to try digital currency investments.

Digital currency volatility will probably continue to move closer to the traditional market as cryptocurrency gains mainstream acceptance.