- Dan Ashmore, our head of research, points out that Bitcoin’s volatility is a major hindrance
- The volatility is currently the lowest since January, but it needs to drop further for Bitcoin to be useful
- For Bitcoin to become a true digital gold, it must become boring, like gold, with its famously steady return profile
Although the situation appears to be calmer in Bitcoin markets for the time being, it won’t be for long. And the problem is huge.
Turning our attention to the short-term volatility, we see that it has dropped a bit recently. If we calculate the 1-month volatility on an annualised basis, the figure is now the lowest since January, when the Bitcoin surge began.
While this is cause for slight relief, it doesn’t mean the market is stable. The crypto markets remain highly unpredictable and can go up and down in a matter of seconds. Volatility is still close to 50%, which is outrageous when compared to other markets.
To illustrate this better, let’s compare Bitcoin’s daily returns to Tesla’s. Tesla’s stock is one of the most volatile members of the S&P 500, and its price is just as unpredictable as its CEO’s Twitter feed. Comparing Bitcoin’s volatility to Tesla is like comparing the ability to manage a football team to Todd Boehly (seriously, what’s up with that?).
And yet, Bitcoin’s daily price changes not only match Tesla’s but usually exceed it.
If we look at Bitcoin’s volatility over a longer period of time, we can see that these periods do occur, even if not for long. Bitcoin and volatility are like Frank Lampard and Chelsea – sometimes apart but ultimately always together. And it’s a toxic relationship.
It’s clear that volatility is one of Bitcoin’s major drawbacks. It’s difficult to imagine the asset becoming a store of value while it fluctuates like this.
If the ultimate goal is to make Bitcoin a digital gold, it still has a long way to go. Comparing it to gold will bring the disparity between the two assets to light:
It is impossible to predict what will happen in the future. But for Bitcoin to fulfil its potential, it has to change. Bitcoin is currently not doing anyone any good.
The argument is often made that Bitcoin could be useful in the developing world. It could offer a better way to store financial wealth. Although this could be true eventually, even a collapsing currency like the Argentinian peso is not as volatile as Bitcoin. A steady decline, such as the peso, is at least easier to prepare for than Bitcoin, which can drop 20% in a few minutes.
My friends often tease me for talking about gold, or writing analytical pieces on its price drivers. Boomer, they call me. Which is fair – gold is incredibly dull, and watching its price chart is like watching paint dry. But that’s the point – gold is a store of value and should not be subject to gains and losses that get investors excited. Otherwise, it would not be doing its job.
The same applies to Bitcoin. It needs to take a page out of gold’s book and become boring. Until that happens, there can be no point to this mythical asset other than wild speculation.