In its report on bitcoin of March 3, the analytical firm Ecoinometrics presents several arguments opposing the frequent claims about the volatility of bitcoin. The report states that, considering volatility in isolation, it cannot be assured if a certain asset is a good investment.
Volatility must be considered in conjunction with returns risk-adjusted in order to assess the viability of an investment, says the report. More specifically, according to Ecoinometrics, a suitable metric should be used to calculate the risk-adjusted return of a fall in the asset price, such as the Sortino quotient. The latter was addressed by CriptoNoticias in an Ecoinometrics article on the benefits of including bitcoin in traditional investment portfolios.
When volatility is considered in conjunction with metrics such as the Sortino ratio, bitcoin It is more attractive as an investment, says Ecoinometrics.
Another of Ecoinometrics’ arguments is based on the fact that bitcoin is a recent asset, with a history that barely exceeds 10 years.
Bitcoin is very early on the adoption curve. In the current phase, the rapid growth of the network means an exponential increase in its value. Obviously, this does not translate into stable prices. As adoption grows, it will naturally reach a maturity stage and transition to something that can be used as a medium of exchange. But we haven’t made it yet. There is no point in worrying about that.
The reference framework used by Ecoinometrics to compare the volatility of bitcoin with that of other assets is the technical definition of volatility: «You take a certain period and you examine the variance of daily returns in that period. The graph below shows volatility for bitcoin and other assets and indices, such as the S&P 500 and Nasdaq. Includes companies such as MicroStrategy (MSTR), Square (SQ), Tesla (TSLA), Marathon (MARA) and Riot (RIOT).
The variation of the volatility of the different assets is measured according to the displacement in the horizontal axis of the respective variance graph. Thus, as shown in the graph, most of the returns for bitcoin are in the range of 100% per month, although a fraction of these exceed that limit. However, companies like Tesla, Marathon, MicroStrategy and Riot, whose graphs are shifted to the left, show more volatility than bitcoin .
Ecoinometrics argues that in the news of many media there is a focus on volatility that is repetitive and negative towards bitcoin.
But this guy volatility is not exactly about what you read in the news. The volatility that most people have in mind is Bloomberg volatility: “Today Bitcoin peaked at $ X dollars, but ended the day down 20%! Bitcoin is dead. ”
The falls in the price of bitcoin enter, together with the volatility, in a media treatment that is unfavorable to bitcoin, says the report. For that reason, Ecoinometrics analyzes these declines statistically, along with declines in the price of other assets.
Statistical analysis of the price falls of bitcoin
For analysis and Comparing the days “in red” of bitcoin, the author takes the days in which the return is negative, and calls these “days of decline”. Then calculate the percentage change from the peak to the closing price. “This percentage is what typically stands out in the news headlines,” says Ecoinometrics.
Each point is placed according to the percentage of fall. The greater the percentage of drop, the point would go further to the right, Ecoinometrics notes. For most assets, the highest density of points corresponds to the most common drop percentages ranging from 0% to 5% , the report says. The tail of the distribution, when the points are no longer concentrated, extends in the zone between 5 and 10%, while falls of more than 10% are infrequent, highlights Ecoinometrics.
¿ What is the difference with the distribution of the days of fall of bitcoin? The question arises in the document and then the answer: «The tail. The difference is in the tail. ”
The author clarifies that most of the falls in bitcoin are concentrated in the region of 0 to 10% . Then would come a thick tail in the range between 10% and 20%, while declines beyond 20% are rare in the case of bitcoin. “If that percentage from the high to the closing point is your benchmark for volatility, then yes; bitcoin tends to be more volatile on declines, “says the document.
But there is an important reason in the trading of bitcoin associated with volatility, says Ecoinometrics.
There is a crucial difference between bitcoin and those other assets: bitcoin is traded around the world, 24 hours a day, 7 days a week, all year round and without interruption. If your typical stock were to trade under those conditions, you could also end up with a thick tail.
The thick tail does not seem to thin out if the distribution of the days of fall is segmented by the cycles of halving, says the document, according to the graphic above. But honestly, it’s still early for bitcoin. It is opportune to review the scenario at the end of this halving cycle. ”
Among the various Ecoinometrics analyzes on bitcoin, in mid-January he conducted a study of Bitcoin’s halvings in the search for keys on the current bullish cycle, which was reported by CriptoNoticias.