Are Cryptocurrencies Too Volatile? This is the question he answers André Dragosch – Head of Research at ETC Group, a partner company of HANetf – who, in a long analysis, addresses the issue of cryptocurrencies as an asset class andhigh volatility.
Cryptocurrencies, too volatile?
“Many traditional financial investors tend to avoid cryptocurrencies due to high volatility compared to traditional asset classes such as stocks, bonds and most commodities. Over the past 3 months, for example, the annualized volatility of Bitcoin and Ethereum has hovered around 45% and 50% respectively, while the volatility of the S&P 500 has hovered around 15%.
However, high returns – i.e. where there is growth – correspond to high risks, i.e. volatility,” explains Dragosch. In the specific case of cryptocurrencies “it is also necessary to keep in mindonto that they are still a young asset class. Bitcoin, in fact, has just turned 15 and Ethereum has only been in circulation since 2015. This relatively young context raises some questions:Will Bitcoin replace the US dollar as the global reserve currency? Will Ethereum be the go-to platform?
Bitcoin and Ethereum the possible scenarios
While these types of scenarios have become increasingly likely in recent years, “uncertainty around these issues remains, and uncertainty tends to create volatility.
We have already observed a similar structural decline in volatility in the case of cryptocurrencies. For example, while Bitcoin’s volatility was around200% annualizedor during the first era until 2012, has dropped to just 45% annually more recently.”
ETC Group Analysis
One of the reasons for these declines “is that the scarcity of Bitcoin has increased with each Halving which has made the cryptoasset more “similar to gold”. However, the distribution of Bitcoin returns remains highly skewed to upside, meaning positive returns are more likely than negative ones. In contrast, global monetary growth has fluctuated quite wildly due to the vagaries of central bank monetary policy and the global business cycle. Therefore, it can be said with reasonable certainty that Bitcoin’s exchange rate volatility is driven by wild swings in fiat money supply growth rather than by variations in Bitcoin’s own supply growth.”
In perspective – concludes the expert – ”the decline in volatility is set to continue with each new Halving. The next one is scheduled for 2028 and will make Bitcoin 4x scarcer than gold in terms of supply growth. Furthermore, the increasing adoption of this technology by the retail and institutional sectors is set to structurally reduce volatility over time”.
