“Investors overestimate bitcoin volatility”: Fidelity

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One of the most frequent criticisms made of bitcoin (BTC) is its volatility. According to many, this makes it not useful as a means of payment. There are also those who claim that, for this reason, it is a high-risk investment. But… are these accusations well founded? The price of bitcoin is volatile, that cannot be denied. But a recent report from asset management company Fidelity shows that this volatility is overestimated. Implied volatility is a measure of the perceived future risk of an asset, such as bitcoin. It is calculated from the prices of derivatives, such as options, that are traded on the market. According to Fidelity's report, bitcoin's actual volatility has generally been much lower than even market professionals expect. This suggests that bitcoin volatility is poorly understood and still “in the process of discovery”. Regarding this year, implied volatility also suggests a strong increase during the rest of 2024. However, it remains to be seen if the “actual volatility will conform to these expectations,” Fidelity highlights. At this point it must be taken into account that, although it may increase this year – according to the report – bitcoin is now “less volatile than some prominent individual assets,” many of which are widely held by traditional investors. As can be seen in the following graph, bitcoin has been less volatile than the shares of the streaming platform Netflix (NFLX). NFLX's realized volatility over a 90-day period averaged 53%, while bitcoin's realized volatility over the same period averaged 46%.

Comparison of bitcoin and Netflix volatility. Source: Fidelity. Although bitcoin in its early years had high volatility, Fidelity assures that this is normal, since a nascent asset with a small market capitalization is more likely to experience it. However, as bitcoin has matured and increased its total market capitalization, volatility has decreased, as seen in the graph.

Spot ETFs accelerated bitcoin maturation

“Throughout 2023, we saw an increase in bitcoin market cap and a drop in realized volatility levels,” Fidelity says. The following chart shows the price of bitcoin and realized volatility averaged annually, which has been below 50% at times (now, for example).

Bitcoin volatility. Source: Fidelity. Therefore, the drop in volatility cannot be due to a lack of interest in bitcoin. What this may be indicating is that bitcoin is maturing and this was further accelerated by the approval of 11 bitcoin ETFs in the United States at the beginning of the year, as reported by BitcoinDynamic. “Bitcoin was almost half as volatile in 2024, at $60,000, compared to 2021. Putting all this together, a thesis begins to emerge that points towards growing acceptance of bitcoin due to its potential maturation,” the report highlights. .

Bitcoin volatility and the future of its price

The drop in volatility should be the time when investors «are most excited» because it may be pointing to the «beginning of an increase in price,» Fidelity notes. That is why the beginning of 2024 has proven to be a unique period of low volatility that coincides with all-time price highs. Precisely, bitcoin reached $73,000 last March.

«After doubling its price, bitcoin has historically continued its upward race until the observed volatility increases to a level where the price of bitcoin is overheating. This is where the price appreciation phase comes to an end and the energy of the sellers seeks to find its bottom. Fidelity, digital asset manager.

“Seller energy” refers to the activity and behavior of sellers in the market. In the context of financial markets, this term is used to describe selling pressure or the intensity with which sellers are willing to sell their assets. For Fidelity, volatility, or the measure of how quickly the price of bitcoin changes, can be a useful tool for those looking to understand the current bitcoin market. By looking at volatility, along with other factors such as the bitcoin cycle, investor positioning, and market psychology, traders can get a better idea of ​​how bitcoin might behave in the future. In the opinion of Michael Saylor, president of the computer company, MicroStrategy, the volatility of bitcoin is not that important, For him it is simply something that must be accepted. “If you wanted volatility to go away, you would regulate it. And when you regulate it, you damage it,” she said.