Decline in the volatility of bitcoin
Bitcoin is widely considered a highly volatile asset. Both the Consumer Financial Protection Bureau and National Association of Attorneys General have cited volatility as a significant risk of holding bitcoin. One might debate the extent to which volatility is a problem for routine users, but there is no denying that volatility has declined significantly.
Eli Dourado maintains the Bitcoin Volatility Index, presented as a solid blue line in the chart above. Volatility—or the amount by which the price varies over time—is measured as the standard deviation of daily returns for the preceding 30-day window. The volatility of bitcoin has fallen from an average of 3.19% in September 2010 to 0.96% in April 2016. The dashed grey line represents the linear trend of volatility over the entire series. Volatility has decreased significantly.
Why has volatility fallen? As Jim Harper noted last September, bitcoin’s volatile price is a reflection of (1) uncertain future use and (2) thin markets. As the network of bitcoin users increases and demand becomes more stable, volatility should fall. And it has.
To be sure, the price of bitcoin remains more volatile than other major currencies. But the gap is shrinking.
William J. Luther
William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News. Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.
