A Closer Look at Bitcoin’s Volatility

In a previous article, we discussed why bitcoin is volatile at a fundamental level. In this piece, we explore the data behind bitcoin’s volatility, how it compares over time and to other assets, and why volatility might be welcomed by investors, including a model that links bitcoin’s volatility to the market cycle’s price.

Key Takeaways

• Bitcoin is volatile, but less so than many popular mega-cap stocks.
• Bitcoin is currently less volatile than 33 S&P 500 stocks, and as recently as late 2023, there were 92 S&P 500 stocks more volatile than bitcoin.
• Bitcoin’s volatility has declined and is expected to continue doing so. 
• Investors have historically been well compensated for bitcoin’s volatility. 
• We propose a model that looks at bitcoin’s historic volatility at extremes, linking it with on-chain data to identify periods where volatility is historically low and seller energy is high. 
• One of these rare occurrences may be occurring in early 2024, potentially setting the stage for bitcoin’s price to rise if the past cycles are any indication of future cycles.

Examining Bitcoin’s Volatility

There is no denying that bitcoin is volatile as an investment asset class, both on an absolute basis and when compared to traditional asset classes. In fact, from 2020 to 2024 (chosen to capture at the most recent four-year cycle in bitcoin), bitcoin has been three to nearly four times as volatile as various equity indices, as shown in the chart below. 

This is especially noteworthy as equity indices are typically considered the “riskiest” part of modern traditional portfolios due to their historical volatility. 

Bitcoin Can Be Less Volatile than Many Large and Popular Securities

While bitcoin as an asset class is certainly more volatile than other major asset classes, it is interesting to note that bitcoin is now less volatile than some prominent individual securities—many of which are widely held among traditional investors. 

For example, over the last two years, bitcoin has been less volatile than Netflix (NFLX) stock. The realized volatility of NFLX on a 90-day timeframe averaged 53%, while bitcoin’s realized volatility over the same timeframe averaged 46%. 

When compared to the “Magnificent Seven”, a group of high-performing and influential stocks, Bitcoin’s volatility does not appear as an outlier.

In fact, compared to all S&P 500 constituents, bitcoin has recently been exhibiting a lower historical annualized volatility figure than 33 of the approximately 500 companies in the S&P 500. Bitcoin was actually less volatile than 92 of the S&P 500 stocks in October of 2023 when using the 90-day realized historical volatility figures. Some of these names are also large-cap and mega-cap stocks. 

Bitcoin’s Volatility Has Declined and Could Decline Even Further

As to be expected, a young and nascent commodity or asset class with a small market cap is more likely to experience higher volatility as new capital flows into the asset. Bitcoin has been no exception with regular volatility in the triple digits, even breaching 200% on an annualized basis in its early years.

However, as the asset class matures and its total market cap grows, the inflow of capital is expected to have a smaller impact because it will be flowing into a larger capital base. In other words, new capital inflows will not move the market or the marginal buyer or seller as much. 

This trend can be observed below as a downward sloping regression line in the long-term volatility chart of bitcoin: 

In fact, there is a historical precedent for an emerging store of value asset class that had to undergo a similar price discovery process and, therefore, exhibited a similar surge in volatility before declining: gold.  

Shortly after the U.S. dollar was de-pegged from gold and then as private U.S. citizens were allowed to own it again, gold’s price rapidly increased alongside inflation while volatility spiked to over 80—almost double bitcoin’s volatility in April 2024.

Once gold became a recognized asset class and the market settled on a longer-term price range, volatility declined as well. However, when the price of gold rose and reasserted itself in 2007 through 2013 following the Great Financial Crisis, volatility increased once again as market participants experienced another period of price discovery. 

Bitcoin’s forward-looking implied volatility as measured by traders’ pricing of derivatives, has consistently been higher than what is then actually realized.* As seen below, the implied volatility has erred on the side of overestimation most of the time. For the purposes of this article, we will continue to focus on historical realized volatility. However, it is worth noting that the actual volatility has usually been much less than what even market professionals expect. This may be another sign of bitcoin’s volatility being misunderstood and still undergoing a process of discovery. 

*This metric shows the At-The-Money implied volatility for options contracts that expire six months from today. (Glassnode)

Even more telling is the Sortino ratio, which only considers downside risk (standard deviation) in its calculation, providing investors with a lens of how much downside risk they are accepting for the return. Here, bitcoin’s Sortino ratio of 1.86 is nearly double its Sharpe ratio, revealing much of the volatility was to the upside. 

This is not to say that bitcoin has not experienced significant price drawdowns or high standard deviations to the downside, but the key factor is that there have been more instances of the price moving quickly up versus down over time. 

A histogram showing bitcoin’s monthly price returns illustrates this with the positive monthly return mean of 7.8% from 2016 to 2024 (two Bitcoin cycles) compared to the mean of 1.1% for the S&P 500, which is also more normally distributed:

Crafting a Model and Narrative to Understand Bitcoin’s Volatility Regimes

While the above section has been largely focused on bitcoin’s volatility statistics, we now turn our focus to observations about bitcoin’s volatility and its behavior. How has bitcoin’s volatility progressed over its various cycles and what could the different volatility regimes tell us about potential future adoption and price? 

Volatility Is at a Historic Low

Throughout 2023, we saw a rise in bitcoin’s market cap and falling levels of realized volatility. There has never been another instance where bitcoin’s market cap was over $500 billion, and its one-year realized volatility was lower than 50% until now. Realized volatility of less than 50% has occurred in just 5% of bitcoin’s existence. This can be seen clearly when looking at the chart below, which shows price and realized volatility with instances of sub-50% realized volatility marked in green.

Furthermore, as bitcoin’s volatility fell throughout 2023, its market cap rose. Therefore, the drop in volatility cannot be due to a lack of interest in bitcoin. Capital flowed into bitcoin throughout 2023 amidst a downward trend in realized volatility. 

What this may be pointing to is a growing belief that bitcoin is maturing, further accelerated by the landmark approvals of several spot Bitcoin exchange-traded products in the U.S. The anticipation of this event may have led to a steady increase in price, up 150% in 2023, and a steady decrease in realized volatility, down 20% in 2023. Moreover, February 2024 saw bitcoin cross above $60,000 with a much lower realized volatility than has been seen previously. 

Bitcoin was nearly half as volatile in 2024 at $60,000 when compared with 2021. When putting this all together, a thesis pointing toward a growing acceptance of bitcoin due to potential maturation begins to emerge.

Historically Low Volatility Has Been a Precursor to a Price Increase

Bitcoin’s one-year realized volatility becomes particularly noteworthy when it reaches new all-time lows. These low volatility environments can become the foundation for future upward moves in price. Circled below are four instances of realized volatility hitting a new all-time low. One instance is currently playing out in early 2024, while the other three were followed by steep rises in price.

The following table also illustrates how all-time lows in realized volatility directly preceded large percentage price gains in bitcoin:  

Why Does Low Volatility Precede Large Price Increases?

At first, the drop in realized volatility almost immediately preceding or during a new bull run seems counterintuitive. Ironically, this should be the time when investors are most excited because it may be signaling the beginning of a rise in price. However, realized volatility tells us this is not the actual sentiment because price swings become somewhat muted.

Of course, past performance is no guarantee of future results and these past correlations were merely that–correlations and not causations. However, we believe there may be some basic market psychology and patterns that answer this question. The answer may be seller energy.

Historically, low volatility has typically occurred at the end of long bear markets after all the selling has been exhausted and seller energy is low. This historically has been when bitcoin’s price bottoms out and begins to methodically increase. It appears that during these times, investors are either apathetic towards price, demoralized by the price action, or in some cases have sold and left the bitcoin market altogether.

Seller energy helps us take a closer look at investor sentiment by taking the percentage of addresses in profit and dividing by one-year realized volatility. (Note that we use percentage of addresses and not total bitcoin supply because this brings the metric closer to the individual level.) This adds an investor lens to volatility that otherwise would not be there. What we find when doing this is that seller energy has historically been above its 95^th percentile at the beginning of bull markets. 

This makes sense because a ratio of addresses in profit and realized volatility should be viewed as interacting positively when the numerator is rising and denominator is falling (rising addresses in profit and falling volatility). This is reflected in the chart below by a rise in seller energy above the 95^th percentile in particularly critical moments.

Similarly, if seller energy is peaking, very little selling has occurred at that point. As price moves higher, seller energy begins to decrease as selling ensues. However, as sellers begin to sell, this can be offset by new buyers entering the market, keeping prices high for some time before the price begins to drop off. Inevitably, the drop-off occurs and that is why we see price and seller energy bottoming at the same time.

The below chart shows seller energy and price in green when it is above the 95^th percentile and in red when it falls below.

Looking at a chart of seller energy and the number of days below an all-time high appears to further strengthen this thesis. When bitcoin has gone a long stretch without an all-time high, we see seller energy entering above the 95^th percentile. 

It takes unique instances of long bear markets to get seller energy to this point. These are rare occurrences that have only happened twice in bitcoin’s history, 2013 and 2017, before this current instance. Once a new all-time high in price is reached in this environment, we observe a phenomenon which we are calling a “green cross” and can be seen as a bullish signal of pent-up energy. Here are the three instances of a green cross and how price responded over the next 12 months and at its peak. 

When looking at this pattern, the glaring absence of the 2020–2021 period cannot be understated. Global events like the COVID-19 pandemic can vastly change the trajectory of any market, bitcoin included. 

In the beginning of March 2020, realized volatility was steadily declining and bitcoin was seemingly on its path to a Price Bottoming phase or a period where volatility and the percentage of addresses in profit are both low. However, when the world shut down, bitcoin’s price dropped rapidly. This led to an immediate spike in realized volatility, breaking the previous pattern. 

On March 8, 2020, bitcoin closed at $8,110 and by March 12, bitcoin was down 40%. The Dow Jones Industrial Average saw similar action on March 6 with a close of 25,864 and a 18% decline by the close on March 12. 

This was then exacerbated by an influx of new liquidity into the market, resulting in a sharp rise in price. Unforeseen events like these can happen at any time and disrupt the entire market. In this case, we saw a jump from Price Reversal Phase to Price Acceleration Phase due to the pandemic and saw price rise rapidly without a typical cooling down, low volatility period in between.

Putting It All Together: Can Volatility Give Clues to Future Price Movements?

As demonstrated above, we believe there is a classic psychological narrative that links the relationship between bitcoin’s realized volatility and addresses in profit known as seller energy. A typical bitcoin cycle sees a long bear market with a low percentage of addresses in profit and high volatility followed by a subsequent decline in volatility and still the low percentage of addresses in profit, or a price bottoming phase.

As price rises out of the bear market there is a rise in addresses in profit as seller energy reaches its high. Moreover, the number of days below an all-time high peaks just as volatility reaches its low. We are calling this the price appreciation phase. All the while, price and the percentage of addresses in profit steadily rises in a low volatility environment until a new all-time high is reached. 

At this point, volatility begins to pick up and price accelerates as we enter a phase where volatility and the percentage of addresses in profit are both high.

What Could the Digital Asset Community Expect?

As noted above, early 2024 has shown to be a unique period of low volatility coinciding with all-time highs in price. 

Although past performance is no guarantee of future results, investors have historically experienced large price increases in short periods of time once all-time highs in price were revisited and subsequently broken under these circumstances:

After a doubling in price, bitcoin historically has continued this run higher until realized volatility rises to a level where bitcoin price is becoming overheated. This is where the price appreciation phase comes to an end and seller energy looks to find its bottom.

Conclusion

Bitcoin has long been seen as a highly volatile asset. New assets typically take time to undergo price discovery, maturation, and then settle into lower volatility. Even gold experienced high volatility when the U.S. came off the gold standard in the 1970s. 

In its mere 15 years of existence, bitcoin has shown signs of maturation. Bitcoin volatility has seen new all-time lows on a yearly scale. Bitcoin also just reached a full year of weekly volatility below 75% for the first time ever. There is a clear downward trend in volatility for bitcoin over its lifetime and we believe this trend will continue as bitcoin continues to mature over time. 

Moreover, we believe volatility can be used as one tool of many to gauge bitcoin’s current environment and, when combined with a framework of bitcoin’s cycle as well as individual investor positioning and psychology (in terms of percent of addresses in profit), investors may be able to gain more insights into how bitcoin may perform in the intermediate future. 

Contributors:

Zack Wainwright Research Analyst, Fidelity Digital Assets

Chris Kuiper Director of Research Analyst, Fidelity Digital Assets

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