Bitcoin Volatility Drops to Record Low: Here’s the Reason

Bitcoin volatility has collapsed to a record low not witnessed since 2012 as the crypto asset makes its entrance into traditional finance amid the spot ETF approvals.

Volatility refers to the extent of price fluctuations a digital asset experiences within a specific period. Highly volatile cryptocurrencies can see significant price changes in short time frames, posing both opportunities and risks for investors. 

Assets with extremely high volatilities are often new entrants to the market, and meme coins with lower valuations. Notably, factors such as market demand, regulatory developments, and macro trends contribute to cryptocurrency volatility.

Historical Data on Bitcoin Volatility

At Bitcoin’s earliest days, the asset witnessed high volatility due to its nascence, leading to the massive price gains it printed. For instance, BTC soared from a low of $2 in November 2011 to a high of $1,163 in November 2013, marking a 58,000% gain in just two years.

However, this increased volatility also contributed to sharp price declines, with the crypto asset also plummeting 87% from the $1,163 high to a low of $152 in January 2015. Bitcoin’s volatility as of January 2012 stood at 179%, per data from Charlie Bilello, Chief Marketing Strategist at Creative Planning.

Bitcoin's 12-month annualized volatility…
Jan 2012: 179%
Jan 2013: 68%
Jan 2014: 140%
Jan 2015: 81%
Jan 2016: 61%
Jan 2017: 49%
Jan 2018: 102%
Jan 2019: 85%
Jan 2020: 65%
Jan 2021: 85%
Jan 2022: 73%
Jan 2023: 63%
Jan 2024: 45%$BTC pic.twitter.com/Z2ZEeew1Yx

— Charlie Bilello (@charliebilello) January 27, 2024

Bilello’s disclosure revealed that Bitcoin volatility has continued to decrease since then, but remained fairly high when compared to more stable asset classes in traditional finance. Volatility dropped to 68% in January 2013, and then rose to 140% in January 2014, as BTC saw greater demand.

From January 2014, Bitcoin’s annualized volatility saw consecutive yearly declines until it hit a low of 49% in January 2017. Following the 2017 bull run, which saw BTC spike to a new all-time high of $19,666, Bitcoin volatility rose to 102%.

For context, gold’s volatility as of 2019 was 15.44%, while the S&P 500 had a volatility of 14.32%. Some TradFi investors have pointed to Bitcoin’s high volatility as a reason to steer clear of the asset, as investments in it could lead to substantial losses.

Volatility Drops to 45%: Possible Reason

Bitcoin’s annualized volatility had been fluctuating between 63% and 85% since 2019. However, as of January 2024, volatility dropped to 45%, marking the lowest recorded rate since 2012. 

This collapse has been ascribed to Bitcoin’s entrance into TradFi following the SEC’s spot Bitcoin ETF approval. Interestingly, volatility remained high at the early stages of the approval due to the massive outflows from the Grayscale Bitcoin Trust (GBTC), according to analysts at Bitfinex.

As the Bitcoin ETF market progresses to a more mature stage, these outflows have slowed, with their effects on volatility seeing a reduction. Bloomberg ETF analyst James Seyffart predicted earlier this month that the spot Bitcoin ETF approval would reduce Bitcoin’s volatility.

While the reduction in volatility might not appeal to short-term investors aiming to profit with large price movements, it points to Bitcoin’s maturity as an asset class. This volatility drop would be favored by long-term institutional investors.