Is bitcoin digital gold? A look at volatility.

  • Volatility measures the dispersion of returns in a given time.
  • Bitcoin (BTC) displays 12x the volatility of the USDEUR pair.
  • Given its volatility, bitcoin’s risk-adjusted performance depends on explosive future price growth.
  • Bitcoin is more akin to an emerging currency. But what if it’s so much more?

What is volatility?

Conventional wisdom tells us that bitcoin is more volatile than other, more widely used, investments. But is that true? And if so, how does that affect us as investors?

Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.” - from Investopedia. The article also instructs: “It's important to understand the difference between volatility and risk[...]. Volatility in the financial markets is seen as extreme and rapid price swings. Risk is the possibility of losing some or all of an investment.

We need to understand what dispersion of returns means and we now know that, while volatility is related to price swings, it does not necessarily mean losing some of our investment. When we ask Investopedia, it tells us that “dispersion usually refers to the range of possible returns on an investment.”

We can summarise by drawing a comparison to darts. If our investment decision means shooting a dart, volatility is our precision; how far apart our marks on the target board are.

How volatile is bitcoin (BTC)?

Armed with a clear definition of volatility, we’ll look at bitcoin and compare it to other assets in that regard. For our purposes, we will look at 60-day and one-year volatility. Our values are in percentages to express the range of results and to allow apples-to-apples comparisons abstracted from the underlying values.

The charts for this research come from the one and only Willy Woo, who is a true trailblazer for on-chain analytics. First, let’s look at 60-day volatility. Leaving out the early days, Bitcoin’s volatility covers everything between highs of 41.7%, in February 2018, and 1.86%, in November of that year. As a comparison, we chose the USDEUR volatility, because investors are used to it in the fiat arena and can handle or hedge well. This asset’s 60-day volatility covers values between 4.5%, in June 2010, and 0.32%, in July 2014.

Since the chart’s y-axis is logarithmic, the apparent closeness of values can be misleading. This November 2021, we have a volatility of 12.6% for BTCUSD and 0.95% for USDEUR. In general, we can see a wide gap between the two, with bitcoin displaying ~12x the volatility of the most traded fiat pair on average.

Compared to the USD price of gold, we see that gold is about 2x more volatile than USDEUR, but still a sixth of bitcoin’s range. Can bitcoin truly be digital gold?

Only emerging currencies exhibit similar 1-year volatility, although their average is still lower.

Our comparison revealed that bitcoin is, without a doubt, more volatile than the USDEUR pair, gold and even emerging currencies. Now we need to know if volatility is a bad thing?

Judgement under uncertainty

For an asset to have a wide variety of returns, there needs to be trading activity and liquidity. Traders like volatility because it offers them more chances to place their bets. High liquidity, conversely, is a universally coveted characteristic. If you hold bitcoin, you want to know that you can sell them at any time, if needed.

A short look at cryptocurrency liquidities reveals bitcoin in first place, aside from stablecoins. More than one trillion worth of BTC were traded in the last 30 days alone.

The table above also lists daily trading volume as a percentage of market capitalisation. Unfortunately, this ratio takes the daily trading volume as an input. More than Tether’s entire market capitalisation worth of USDT is traded within a single day, compared to just 3% for bitcoin. “Hot” coins like LRC show 2 to 10 times as much daily trading volume compared to their market cap.

However you turn it, the market for even the largest of bitcoin transactions is wide open. Volatility has some advantages on that account.

What about storing value in bitcoin. How can we be sure, given an uncertain future, that volatility will not entail risk?

Pricing the risk

Investors often use Sharpe ratios to calculate risk-adjusted returns. “The (Sharpe) ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk”, says Investopedia. The risk-free rate is what, for instance, an investment in US treasuries would have yielded. The higher the Sharpe ratio, the better an investment performs in theory.

The risk of an asset is expressed in the Sharpe ratio’s formula as the standard deviation of returns. That means Sharpe ratios assume normal distributions for returns, which are conspicuously absent from the real world. Without this assumption, we wouldn’t have access to the neat mathematics of Gaussian distributions. Nevertheless, this metric is a tool we can use, and they are a building block of modern portfolio theory.

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We can see bitcoin and Ethereum outperform both gold and US stocks in the chart above. Does this mean that buying BTC is better than buying stocks?

Drawing a clear line between past performance and future returns is especially important here. We can only say that holding bitcoin was a really good choice up until now. We saw earlier that bitcoin’s volatility hadn’t changed much in recent years. It has remained at a certain level since 2016.

Given that, it depends entirely on the future performance of bitcoin if its risk-adjusted return remains so formidable. And the future is unknown.

Digital gold? Or emerging currency?

The chart above shows the one-year volatility of bitcoin and compares it to emerging currencies and oil. In 2020 and parts of 2021, bitcoin exhibited lower volatility than both oil and emerging currencies.

Oil is a unique commodity because its supply and price are heavily dependent on political whim. Huge exporters like OPEC can flush the market with supply or restrict it to adjust prices. This market manipulation by exporters is barely balanced by alternatives and the political clout of purchasers.

Another differentiator is that oil isn’t scarce. While “peak oil” has become a theme in the last 30 years, there seems to be another colossal oil find often enough to keep the barrels rolling.

Emerging currencies, like the Mexican Peso, the Russian Ruble or the Indian Rupee, are a much better comparison. A basket of these currencies has displayed similar levels of volatility as bitcoin in the past decade. While also manipulated by central banks, we could look at big miners as bitcoins ‘central bankers’ in kind. Miners selling their BTC, whether for profit or necessity, are often responsible for major price changes. Can we think of bitcoin as an emerging currency?

Volatility and profit

Since every asset with liquidity also displays volatility, we need to find ways to make a profit regardless or to hedge our losses at the very least, and decouple our risk from the market’s wild swings.

A purchase of BTC in April 2021 would have resulted in a net loss when selling until very recently this November. Seen from the point of entry in April 2021, returns were still volatile, but all the volatility was in negative territory. The overall distribution of returns matters just as much as the direction of the distribution.

Event-driven trading is one approach that profits from volatility. This strategy expects an asset’s price to follow happenings that concern the asset. El Salvador’s adoption of bitcoin is one such example. Bitcoin reaching all-time highs is, in a way, another bullish event in itself. Chart indicators are often good markers for where traders’ sentiments will shift next. A good place for information is Willy Woo’s excellent newsletter, as well as Numbrs on-chain snaps, of course.

Several more advanced strategies like Straddles and Strangles involve options—reserved for experienced traders with deep knowledge of options pricing. Here is a link to Investopedia explaining the process in detail for those who are interested.


We have defined volatility, compared bitcoin to other assets, and discussed strategies to deal with volatility.

Comparing bitcoin, with $1.2tn market capitalisation, to a growth stock is absurd. Comparing it to an emerging currency seems to be a much better fit. Bitcoin, in the same manner, is in a process of development only 12 years young. Like an emerging economy it is on a growth path, with its ups and downs. But maybe this comparison falls short in other ways.

Nakamoto laid the basis for a whole new economic system with his whitepaper in 2009. It revolutionised the way we think about trust, centralisation and aligning incentives to make cooperation the only economical choice. This quantum leap in the way we think about cooperation has the potential to radically change how economic activity is performed. What if bitcoin is more than just an emerging currency? What if it is the beginning of a new economy? What if bitcoin is the root of a nascent monetary system?

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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