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There has been a lot talk lately - and especially after today's latest crash - regarding how volatile Bitcoin is, and for good reason, Bitcoin’s 30 day realized volatility is a shade under 96% at 95.5%, which implies a daily move of 5.8%. By comparison, the S&P 500 has a volatility of 6.5% and an implied daily move of just 0.40%, while Bank of America - with a market cap of $302 billion similar to that of Bitcoin’s $306 billion (well, as of yesterday) - has a volatility of 21.5% and implied daily move of 1.35%. While there are probably penny stocks out there that either as volatile as or more volatile than Bitcoin, we will only be looking at liquidly traded investments.
Bitcoin vs. FX
Deutsche Bank recently published a research piece that states 40% of Bitcoin trading is dominated by Japan. Former leveraged retail FX traders, colloquially known as “Messrs. Watanabe”, have accounted for nearly half of all cryptocurrency trading since China shut down cryptocurrency exchanges earlier in the year. It makes sense that “Mr. Watanabe”, has moved on from FX trading to bitcoin trading. EURJPY has a volatility of 7.77% and implied daily move of 0.49%. To put that in perspective, a 5.8% move in EURJPY would be a 6.8 sigma move. Put another way, there is a 1 in 100 million chance of that happening. Also, it requires less leverage to make more money trading Bitcoin than trading FX.
Earlier this year, we pointed out that the Turkish Lira was 2016’s most volatile of currency in the world. The Turkish Lira was indeed volatile again this year but still lagged Bitcoin. It has a volatility of 15.1%, with an implied daily move of 0.94%.
Bitcoin vs Energy Commodities
The above is hardly a surprise as we expected Bitcoin to be more volatile than currencies and equities. How about versus energy commodities which tend to be much more volatile than currencies and equities due to issues like storage constraints and weather. Once again Bitcoin outshines most energy commodities like oil and natural gas. Oil has a volatility of 22.8% and implied daily move of 1.43%, while US Natural Gas has a volatility of 45.4% and implied daily move of 2.84%.
Yet while neither WTI nor US Natural Gas come close to being as volatile as Bitcoin, there is one energy commodity that Bitcoin lags behind - the one that Enron for various reasons had a particular affinity for: Electricity.
And boy does it lag it: PJM Western Hub Day Ahead Peak prices, one of several US electricity pricing hubs and the most liquidly traded electricity market, has a volatility of 192.8% and an implied daily move of 12.05%. Making it a little more than twice as volatile as Bitcoin. The inability of electricity to be stored causes it to be highly volatile. Unfortunately for “Mr. Watanabe”, power prices are traded on an institutional basis, making it difficult for retail investors to partake in such a highly volatile market.
So yes, while Bitcoin is extremely volatile, outpacing most mainstream investments, let’s not forget there is always something more volatile out there.
Finally, speaking of electricity, it may soon become substantially more volatilte for a bizarrely circular reason: recall that for more bitcoins to be mined, a lot of electricity has to be used; so much so in fact that as of today, a total of 36 TWh per year is being consumed to create new bitcoins. Putting this number in context, it is greater than the total electricity consumption of Qatar, and will surpass that of Peru and New Zealand in just a few days.