Volatility of Fiat Currency Versus Bitcoin

Bitcoin & Fiat Currency Volatility (plot.ly using Bank of England Spot FX Data + Bitstamp BTCUSD Price)

Otherwise known as the Fear Index when applied to the S&P 500, volatility is defined in finance as the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. A measurement of violent price movements in a given asset, volatility correlates with and causes tectonic shifts across the Global Economy.

When investors are fearful, their actions tend to become erratic and illogical. While there is a maniacal focus on S&P 500 Volatility, a powerful metric of Global Uncertainty can be measured across Foreign Exchange volatility. Currency volatility can indicate turbulence and uncertainty in a given country, and the general world economy. Sometimes the trigger can be as simple as an erratic big fish swimming in a shallow pool of liquidity; Such as in the case of the AUDUSD and USDJPY flash crash of January 2019, which followed the S&P 500’s worst decline in a decade.

As a corollary for uncertainty, volatility can indicate and exacerbate financial meltdown and erode faith in an country’s economy. More importantly, such violent price moves can negatively affect the lives of millions of people and businesses within such an economy. While the 2019 flash crash in Yen and the Australian dollar was a mere 4% crash in a few minutes, such a seemingly minor drop can wreak havoc on the balance of the global economy.

G10 Currency Volatility

Since 2007, across the G10 Currencies, Volatility spiked to unprecedented highs during the 2008 Financial Crisis. And ever since the European Debt Crisis of 2015, G10 Currency Volatility has trended toward historic lows (despite 2016 Brexit’s best efforts).

Have things gone too quiet? Or does this newfound stability serve to calm underlying tensions, thereby heralding a new era of optimism in the Global Economy?

Rising from the volatile ashes of 2008, a fascinating new asset was created that regularly puts even 2008’s Volatility Crisis to shame. Bitcoin, a purported alternative to the fiat currency system, is infamous for its insane volatility.

In fact, Bitcoin’s volatility is wilder than even its most violent fiat counterparts:

BTCUSD (green) vs. Russian Ruble (purple), Brazilian Real (blue), Turkish Lira (yellow). Canadian Dollar (red) for stability reference.

Compared to a currency pair like USDCAD or USDEUR, which barely breaches 2% (10-Day) volatility even during the Great Financial Crisis, how is Bitcoin supposed to compete as an alternative to fiat currency? Bitcoin at its lowest volatility is lucky to be below 2%. Why would anyone ever attempt to use Bitcoin as an everyday currency when legacy fiat counterparts are so stable?

Volatility is a reasonable existential risk, and potentially Bitcoin’s Achilles Heel. Defendants will claim that Bitcoin is still relatively new, and thus higher volatility is expected. The Volatility chart referenced above only counts Bitcoin trading since early 2014, since beforehand trading was illiquid on niche exchanges. In order for Bitcoin to ever be taken seriously as a contender for a global reserve currency, there would have to be a major paradigm shift:

Either Bitcoin’s volatility would need to be suppressed, such as via institutional market makers entering the space.

Or a black swan event would have to occur: i.e. a major Volatility Event would have to spike the major world currencies.

USDEUR: Coiled spring, or new paradigm of stability?

If reserve currencies such as the Euro and Dollar move violently in the next few years, Bitcoin’s volatility may seem slightly more normal. And unless Bitcoin’s volatility dampens as its market matures, it will always have a logical concern about volatility. Unless its believers simply embrace its volatility… as a feature, not a bug.

To dig into the chart without commentary, here is the plot.ly link

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