Your Quick Takeaways on Bitcoin Volatility

Alright, let’s talk Bitcoin. Everyone, and I mean *everyone*, has an opinion on its volatility. It’s the perennial headline grabber, isn’t it? From casual observers to seasoned traders, the sheer price swings of this digital asset are often seen as its defining characteristic. But is that the whole story? Or are we collectively missing something crucial about how Bitcoin behaves?

In a previous chat, we dug into the fundamental reasons behind Bitcoin’s inherent volatility. Today, we’re going a step further—we’re crunching the numbers, comparing Bitcoin’s roller-coaster ride to other assets over time, and even exploring why this very volatility might just be a good thing for investors. Plus, there’s a fascinating model on the table that links Bitcoin’s price cycles directly to its volatility extremes. So, if you’ve ever wondered if those wild swings make any sense, or if there’s a method to the madness, you’re in the right place.

Deconstructing Bitcoin’s Volatility: The Raw Numbers

Look, there’s no sugarcoating it: Bitcoin is volatile. Whether you’re looking at its performance in isolation or stacking it up against traditional asset classes, it’s clear this isn’t your grandfather’s bond portfolio. Between 2020 and 2024, a period chosen to capture its most recent four-year cycle, Bitcoin has been somewhere between three and four times as volatile as various equity indices. Think about that for a second! Equity indices are generally flagged as the “riskiest” components in traditional portfolios, historically speaking, due to their own swings. Bitcoin has routinely out-volatiled them.

An Unlikely Contender: Bitcoin vs. Mega-Cap Stocks

But here’s where things get interesting, and frankly, a bit mind-bending. While Bitcoin as an asset class truly does punch above its weight in terms of volatility compared to other major asset classes, individual securities tell a different tale. What if I told you Bitcoin is now less volatile than some seriously prominent individual stocks—many of which are staples in traditional investment portfolios?

Take Netflix (NFLX), for example. Over the past two years, Bitcoin’s been calmer. We’re talking 90-day realized volatility: Netflix averaged 53%, Bitcoin clocked in at 46%. And it’s not just Netflix. Comparing it to the “Magnificent Seven”—those high-flying, influential tech giants—Bitcoin’s volatility doesn’t look so outlandish. More broadly, Bitcoin has recently shown lower historical annualized volatility than the S&P 500 as a whole. In October 2023, Bitcoin was actually less volatile than 92 S&P 500 stocks, many of them large and mega-cap companies. Pretty wild, right?

The Maturation Game: Bitcoin’s Volatility is Declining

It makes sense, doesn’t it? A young, emerging asset class, especially one with a smaller market cap, is naturally going to be more susceptible to wild price swings. New money coming in has a bigger impact, causing those bigger ripples. Bitcoin was no exception in its early days, with volatility regularly hitting triple digits, even soaring past 200% annually at one point. That’s some serious adrenaline!

However, as Bitcoin matures and its total market cap swells, that same influx of capital has a diminished effect. Why? Because it’s flowing into a significantly larger capital base. Essentially, new money doesn’t move the market or influence the marginal buyer or seller as dramatically. We can actually observe this trend as a downward-sloping line on Bitcoin’s long-term volatility chart. That’s a sign of growing pains, in a good way.

And guess what? There’s a historical parallel here with gold, another asset that underwent a similar price discovery scramble. After the U.S. dollar was de-pegged from gold, and when private citizens were once again allowed to own it, gold’s price skyrocketed alongside inflation, and its volatility absolutely spiked. We’re talking over 80%—nearly double Bitcoin’s volatility in April 2024. But once gold settled in as a recognized asset class and the market found its long-term range, yep, volatility declined. Of course, when gold reasserted itself from 2007 to 2013 post-Great Financial Crisis, volatility did pick up again as the market went through another round of price discovery. History often rhymes, doesn’t it?

The Art of Overestimation: Traders and Bitcoin Volatility

Here’s another fascinating tidbit: the market tends to consistently overestimate Bitcoin’s forward-looking implied volatility. This is based on how traders price derivatives. Time and again, the implied volatility has been higher than what actually materializes. While we’ll focus on historical realized volatility here, it’s telling that even market professionals frequently anticipate higher volatility than Bitcoin delivers. This just might be another indicator that Bitcoin’s volatility is still being misunderstood, still in a state of flux and discovery.

Interestingly, current implied volatility suggests a steep increase for the rest of 2024. I, for one, will be keeping a very close eye on how realized volatility actually plays out against that expectation. It’s almost like a psychological battle between perception and reality.

Embracing the Swings: Is Volatility a Friend or Foe?

In the rigid world of traditional finance, “volatility” is practically a dirty word, a synonym for “risk.” Higher volatility instantly translates to higher perceived or actual risk. But let’s pause for a moment. Volatility, at its core, is just a statistical measure of how much returns disperse—think standard deviation. It can measure negative returns, sure, but it can also measure incredibly positive returns. So, is it always “bad”?

Bitcoin, with its infamous price swings, certainly shows high standard deviation. Yet, when you actually look at its returns, they’re often disproportionately skewed to the positive side. Take its Sharpe ratio of 0.96 from 2020 to early 2024. That’s a powerful statement: even with its higher “risk” (in standard deviation terms), investors have been more than compensated. Compare that to the S&P 500’s Sharpe ratio of 0.65 over the same period. Bitcoin pulled ahead decisively.

But the real kicker for me is the Sortino ratio. This little metric only considers downside risk, giving you a clearer picture of how much skin in the game you’re putting in for the potential return. Bitcoin’s Sortino ratio? A stunning 1.86—nearly double its Sharpe ratio! This loudly proclaims that much of Bitcoin’s celebrated volatility has, in fact, been to the upside. Now, I’m not saying Bitcoin doesn’t have its gut-wrenching drawdowns, because it absolutely does. But over time, the key takeaway is that price has moved quickly up more often than down. A histogram of Bitcoin’s monthly returns underlines this perfectly: from 2016 to 2024, its positive monthly return mean was 7.8%, compared to the S&P 500’s mean of 1.1% (which is also much more normally distributed). It’s an interesting contrast, to say the least.

Unveiling Volatility Regimes: A Model for Understanding Bitcoin’s Behavior

We’ve dissected the statistics, but now let’s pivot to something more observed: Bitcoin’s volatility behavior across its various cycles. What can these different “volatility regimes” tell us about its future adoption and price trajectory?

When Low Volatility Becomes a Historic Marker

Here’s a fascinating development: 2023 saw Bitcoin’s market cap rise while its realized volatility dropped. This alignment is pretty unique. There hasn’t been another time when Bitcoin’s market cap was over $500 billion and its one-year realized volatility dipped below 50%—until now. In fact, realized volatility below 50% has only occurred in a mere 5% of Bitcoin’s entire existence. This suggests something fundamental is shifting.

The fact that volatility dropped while capital flowed into Bitcoin throughout 2023 tells us one thing: this isn’t a lack of interest. Quite the opposite. This trend might just signal a growing conviction that Bitcoin is maturing, perhaps accelerated by the landmark approvals of several spot Bitcoin exchange-traded products in the U.S. That anticipation probably fueled a steady price increase, up 150% in 2023, while simultaneously reining in volatility by 20%. And then, in February 2024, Bitcoin blew past $60,000 with a significantly lower realized volatility than its previous visits to that price point. It was nearly half as volatile at $60,000 compared to 2021. Piece all this together, and a narrative of growing acceptance, fueled by a perceived maturation, really starts to take shape.

The Curious Case of Low Volatility Preceding Price Surges

Now, this is where it gets really intriguing. When Bitcoin’s one-year realized volatility hits new all-time lows, it often sets the stage for significant price increases. We’ve seen four such instances where realized volatility bottomed out. One is currently brewing in early 2024, and the other three? They were all followed by steep price rallies. The numbers don’t lie: these all-time lows in realized volatility directly preceded massive percentage gains for Bitcoin. Coincidence? Maybe. Patterns? Definitely worth paying attention to.

Unpacking the Paradox: Why Low Volatility Sparks Price Increases

At first blush, it feels counterintuitive, doesn’t it? Volatility drops right before or during a new bull run? Shouldn’t everyone be hyped, causing prices to explode violently? Yet, realized volatility, that cold hard statistic, tells us the market sentiment is actually somewhat muted; price swings are calmer. Now, I’m a journalist, not a fortune teller – past performance is never a guarantee, and correlation isn’t causation. But I believe there’s some basic market psychology at play here, a pattern of human behavior that might hold the answer: seller energy.

Historically, those periods of low volatility often pop up at the tail end of long bear markets. It’s when all the selling pressure has finally run out, when “seller energy” is at its absolute lowest. This is typically when Bitcoin finds its bottom and then, almost quietly, begins its ascent. It’s as if investors are either totally apathetic, demoralized, or have simply given up and moved on. Seller energy helps us quantify this sentiment. We look at the percentage of addresses in profit and divide it by the one-year realized volatility. (A quick note: we use addresses, not total supply, because it gives us a better read on individual investor behavior.) This layers an investor perspective onto raw volatility.

What we find is compelling: seller energy has consistently been above its 95th percentile right at the start of bull markets. This makes perfect sense; you have a rising number of addresses in profit (numerator) and falling volatility (denominator), which boosts the ratio. You can see this clearly when seller energy breaches that 95th percentile mark during critical moments. Conversely, if seller energy is peaking, it means very little selling has happened. As price climbs, seller energy starts to dip as some selling naturally occurs. However, strong buyer interest can often offset initial selling, keeping prices buoyant for a while before the inevitable pullback. Eventually, the drop-off happens, and that’s why price and seller energy often bottom out in sync.

A look at seller energy alongside the number of days Bitcoin has spent below its all-time high further solidifies this theory. When Bitcoin endures a long dry spell without hitting new highs, seller energy often surges above that 95th percentile. These are rare occurrences, the product of prolonged bear markets. In Bitcoin’s history, this has only happened twice before the current instance: in 2013 and 2017. Once a new all-time high is finally reached in such an environment, we see what I’m calling a “green cross”—a potent bullish signal of pent-up energy. These three instances of a green cross offer a compelling look at how price responded over the subsequent 12 months and at its peak.

And let’s not ignore the elephant in the room: the glaring absence of this pattern in the 2020–2021 bull run. Global curveballs, like the COVID-19 pandemic, can totally derail any market, Bitcoin included. In early March 2020, realized volatility was steadily falling, and Bitcoin seemed to be heading into a “Price Bottoming” phase—a period of both low volatility and low addresses in profit. But then the world shut down. Bitcoin’s price plummeted, causing an immediate spike in realized volatility that shattered the previous pattern. On March 8, 2020, Bitcoin closed at $8,110; just four days later, it was down 40%. The Dow Jones Industrial Average experienced a similar shock, falling 18% in the same timeframe. What happened next? A flood of new liquidity into the market, which then caused Bitcoin’s price to surge. Unforeseen events like these can strike at any moment, upending everything. In this particular case, we skipped from a “Price Reversal” straight to a “Price Acceleration” phase, soaring without the typical low-volatility cool-down period. It’s a powerful reminder that while patterns are useful, the market is ultimately unpredictable.

Connecting the Dots: Can Volatility Really Predict Future Price?

So, taking everything we’ve discussed, I truly believe there’s a classic psychological narrative connecting Bitcoin’s realized volatility and addresses in profit, what we’ve dubbed “seller energy.” A typical Bitcoin cycle seems to kick off with a long bear market, characterized by low percentages of addresses in profit and high volatility. This then transitions into a phase where volatility declines, but addresses in profit remain low—what I’m calling the price bottoming phase. As the market climbs out of the bear market, addresses in profit start to rise, and seller energy hits its peak. What’s more, the number of days spent below an all-time high peaks right as volatility hits its lowest point. This is the price appreciation phase.

Throughout this period, price and the percentage of addresses in profit steadily climb within a low-volatility environment until a new all-time high is finally reached. At this juncture, volatility tends to pick up, and price accelerates into a phase where both volatility and addresses in profit are high. It’s a compelling, interconnected dance of market forces and human emotion.

What the Digital Asset Community Might Expect Next

As I noted, early 2024 has been a unique beast: low volatility coinciding with fresh all-time highs. Again, historical performance is not a crystal ball, but investors have often seen significant price surges in short order once all-time highs are revisited and then smashed under these specific circumstances. After Bitcoin doubles in price, it historically tends to keep that upward momentum until realized volatility climbs to a level where the market starts to feel overheated. That’s usually when the price appreciation phase winds down, and seller energy begins its search for a new floor.

The Evolving Story of Bitcoin’s Volatility

Bitcoin has long been synonymous with extreme volatility. And honestly, it makes sense; any new asset needs time to discover its true price, to mature, and eventually to stabilize with lower volatility. Even gold, our trusty inflation hedge, saw its own wild swings when the U.S. abandoned the gold standard back in the 1970s. In its mere 15 years of existence, Bitcoin is clearly showing signs of growing up. We’ve seen its yearly volatility hit new all-time lows, and for the very first time, it just completed a full year with weekly volatility below 75%. That’s a huge milestone!

There’s a definitive downward trend in Bitcoin’s volatility over its lifetime, and I’m convinced this trend will continue as it matures further. More than just a statistic, I believe volatility can be a powerful tool for understanding Bitcoin’s current market environment. When you combine it with a framework of Bitcoin’s cycles and the psychological positioning of individual investors (measured by the percentage of addresses in profit), we gain deeper insights into how Bitcoin might perform in the medium term. It’s a dynamic, ever-evolving story, and I’m here for it.

Special thanks to the folks who helped put this all together: Zack Wainwright, Research Analyst at Fidelity Digital Assets®, and Chris Kuiper, Director of Research Analyst at Fidelity Digital Assets®. Their insights truly bring this narrative to life.