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Dimensions 101: Adoption, Speculation & the Volatility of Bitcoin

Dimensions 101: Adoption, Speculation & the Volatility of Bitcoin

Explainers Cryptocurrencies

25 Apr 2020

Bitcoin is among the most volatile assets, with the cryptocurrency often experiencing extreme price swings in short periods.

While a high level of volatility opens up opportunities for traders, purchasing and holding the asset also comes with increased risks.

Key takeaways:

  • A highly volatile asset presents increased risks to investors as it is more prone to major price swings in short periods.
  • Investors could take advantage of an asset that has high levels of volatility to make more (potential) profits.
  • Along with the energy industry, commodities, and emerging currencies, cryptocurrency is among the most volatile asset classes.
  • Bitcoin's volatility is influenced by several factors, including the size of the market, the liquidity of the asset, the impact of news, regulation, and the extent to which crypto investors act on speculation.
  • With a pro-regulation approach from governments and innovation-focused mindset from businesses within the sector, the cryptocurrency market could continue to grow organically, potentially reaching mainstream adoption in the coming years.

What Is Volatility?

Let's start with the basics before we deep-dive into exploring Bitcoin's volatility.

Volatility is a statistical measure indicating the dispersion of returns for a specific asset (e.g., Bitcoin, stocks, bonds), or market index (e.g., the S&P 500, NASDAQ 100).

In layman terms, higher volatility means larger price swings (in any direction), while lower levels of volatility represent more stable and predictable price levels for an asset.

Volatility is one of the most important factors to determine the risk level of different assets for investors. The higher the volatility, the more risks an asset poses for traders.

It’s always what makes Bitcoin so attractive.

In one of our previous articles, we studied in depth how Bitcoin acts in comparison to gold, where we found that while gold has an annual volatility rate of 10%, Bitcoin stands out with a staggering 95%.

What Are the Most Volatile Asset Classes?

Some assets are more volatile than others.

Source: Woobull

As you can see in the chart above, Bitcoin is among the most volatile assets out there.

What's even more interesting is that – despite being highly volatile – BTC showcases the lowest levels of volatility among digital assets.

And it makes sense as Bitcoin has the largest market capitalization, an already established infrastructure, a strong community, as well as a solid reputation as the world's original cryptocurrency.

The energy industry – which includes assets like oil, gas, coal, and renewable energy technologies – features the highest volatility in global finance. Over the past few years, oil's volatility has even exceeded Bitcoin's multiple times.

As a result of the current COVID-19 outbreak and the Russia–Saudi Arabia oil price war, the asset's volatility surged in a very short period, being 2.5 times more volatile than Bitcoin at the time of writing this article.

The commodity sector – which includes natural resources like oil and gas, precious metals, and agricultural goods like beef and grain – often feature high levels of volatility.

Emerging currencies represent the national currencies of countries that are in the process of economic development.The leaders in this category are often referred to as BRIC (Brazil, Russia, India, and China).

Emerging currencies are much more volatile than major fiat currencies (e.g., USD, EUR, GBP).

In fact, the least volatile asset classes include major fiat currencies like the USD and EUR, low-yield treasury bonds of developed countries (e.g., the United Kingdom, Germany), low-volatility exchange-traded funds (ETFs), and stocks of established companies in low-risk sectors.

Bitcoin's History of Volatility

You now know that Bitcoin is an asset that features high levels of volatility. But has the cryptocurrency always been this volatile?

The short answer is yes. And BTC's volatility was often higher in the past than currently.

In late 2011, the BTC volatility rate was as high as 279%, where it stabilized for a shorter period, after which it moved to the 50-60% levels between mid-2013 and early 2015.

From 2016, up unto the peak of the bull market in late 2017, Bitcoin's volatility was relatively stable, moving between the levels of 15% and 25% at most times.

Interestingly, the long-lasting "Crypto Winter" in 2018 and early 2019 drove the BTC volatility rate up to as high as 95%.

Signaling the end of the bear market, in mid-2019, the volatility of the cryptocurrency decreased significantly, currently staying under 25% amid the coronavirus outbreak.

How to Calculate Bitcoin's Volatility?

While there are multiple ways to measure volatility, the most widely accepted method indicates the standard deviation between returns from the same market asset or index.

You can either calculate Bitcoin's volatility yourself or use pre-calculated BTC volatility indexes using external resources, such as BitPremier or Woobull.

Example Calculation

Let's say that we would like to measure the volatility of Bitcoin for a 12 month period.

For simplicity, let's say that BTC closed the first month with a price of $1,000, the second month with $2,000, and then continuing this $1,000 monthly value increase until the end of the period.

Take the following steps to calculate Bitcoin's volatility for this period using the standard deviation model:

  1. The first step is to find the mean or average price of Bitcoin for the period. The easiest way to do this is to add together the values of each month and divide them by the total number of months:

    Example: $1,000 + $2,000 + $3,000 +... + $12,000 = $78,000 / 12 months = $6,500
  2. The next step is to calculate the difference between the BTC closing price for each month and the mean price for the period. As we need each value, we recommend using a spreadsheet to calculate this stat (also called deviation).

    Example: $12,000 - $6,500 = $5,500
  3. To eliminate negative values, each deviation value should be squared.

    Example: (-5,500)2 = 30,250,000
  4. When you have all the deviation values for each month, add them together.

    Example: 30,250,000 + 20,250,000 + ... + 30,250,000 = 143,000,000
  5. Now divide the sum of the squared deviation values by the total number of months to calculate the variance.

    Example: 143,000,000 / 12 = 11,916,667
  6. Take the square root of the variance you just calculated to measure the standard deviation of Bitcoin's price for 12 months.

    Example: √11,916,667 = 3,452

The standard deviation of $3,452 shows how values are spread out around the average Bitcoin price. Use this value to gather insight into how far the BTC price may deviate from the average value of the digital asset.

What Factors Influence Bitcoin's Volatility?

As mentioned before, cryptocurrency is a highly volatile asset class that is prone to major price swings in short periods, but why?

An Emerging Asset Class

With 2009 marking the birth of Bitcoin, the crypto market is still very young.

And history has proven that an infant market that features new technology is subject to increased levels of volatility and turbulence.

New technology always presents an increased risk for investors as the failure rate is higher at the start.

At the time of writing this article, the total market capitalization of the crypto market is approximately $204 billion.

In contrast, Microsoft (MSFT) stocks alone have a market cap of $1.32 trillion, which is nearly 6.5 times larger than the whole digital asset sector's.

The difference is even higher between the market capitalization of the S&P 500 ($21.42 trillion) and the crypto industry, with the prior representing a 105 times bigger market cap than digital assets.

These stats obviously show that digital assets have not yet been adopted by the masses.

However, as time passes, we can expect this technology to further develop, and investors in crypto would argue that as more people come to adopt crypto for usage (instead of mere speculation), we can expect market cap to go up and volatility to go down.

Example: Tech Stocks and the Dot Com Bubble

Let’s look at a past example of a relatively new sector that has been highly volatile.

The late 1990s and early 2000s are known for the rise of internet-related tech companies, which eventually led to one of the largest stock market bubbles, the Dot Com Crash.

According to a study conducted a few years after the Dot Com Bubble, the NASDAQ Composite index – that includes numerous tech stocks – experienced excessive volatility between 1998 and 2001.

While the NASDAQ Composite includes all the equities that are listed on the exchange, the NASDAQ 100 – where tech stocks represented 70% of the total market cap in late 1998 – had a great influence on the index's valuation during the Dot Com Bubble.

The chart above shows that the NASDAQ Composite's volatility had jumped as high as 53% in 1998, reaching 85% in 2001 when the tech stock market crashed.

The NASDAQ Composite was so volatile at the time that its volatility to the S&P 500 reached nearly 400% when the tech bubble burst.

In the aftermath of the Dot Com Bubble, many tech companies had disappeared. Others had managed to survive the market crash. Since then, the technology sector has established a good reputation and built out a decent infrastructure for itself.

As a result, the volatility of tech stocks has decreased significantly.

Between September 2009 and February 2020, the NASDAQ 100's volatility index (VXN) has mostly lingered between 15 and 20%, and never exceeding 50% (except in March 2020 due to the impact of the COVID-19 outbreak).

The Impact of Major News

Historically, Bitcoin's price has been very sensitive to major newsflashes (both good and bad). When that happens, significant price swings take place, and the volatility of the whole crypto sector increases substantially.

A good example of the impact news can have on Bitcoin's volatility goes back to 2017 when the People’s Bank of China issued a notice stating Bitcoin may be a commodity and that it would conduct on-site checks at crypto exchanges.

The situation created confusion among investors and as a result, Bitcoin's price fell from $1,190 to $760 within seven days.

News covering major hacker attacks are also among the top influencers of Bitcoin's volatility.

On the other hand, positive news events such as the announcement of crypto trading platforms that are targeting institutional investors (e.g., Bakkt), also have a significant impact on the BTC volatility.


Although some governments are ahead in regulating digital assets – there is no universal regulatory framework for cryptocurrencies.

This breeds uncertainty among investors around potential taxes, or in some places even fear of getting caught up in something illegal.

What’s more, bad actors, fraudsters, and cyber criminals can take advantage of such lack of oversight and protection.

Taking advantage can come in the form of market manipulation – such as pump and dump schemes –, fraudulent projects, fake statistics (e.g., false trading volumes), and the lack of transparency from key market players.

On the other hand, regulation has to be done effectively to have positive effects on the crypto sector.

If authorities seem to be imposing overly tight rules on the crypto industry, this may also create confusion in investors and hinder the adoption rate of Bitcoin. Individuals might hesitate to use digital assets, and businesses will face challenges when developing new applications.

Crypto's case with the Internal Revenue Service (IRS) in the United States is a good example of that.

The IRS' decision to consider Bitcoin as an asset for tax purposes had some positive impacts on the industry (as authorities recognized it as an asset).

However, it made things more complicated for crypto users as they now have to record the market value of their digital assets each time they make a transaction.

Due to such record-keeping requirements, users could become more hesitant to utilize crypto, which could slow down the adoption rate of digital assets.

Liquidity and the Risk of Whales

Liquidity in a broader sense refers to the ease with which assets can be converted to cash on demand. It also refers to order books and the extent to which an order book is liquid enough to accommodate the large trade volumes between two different assets or currencies.

While Bitcoin is among the most liquid digital assets, the asset class as a whole is rather illiquid if we compare it to most general market industries. Hence the risk of whales.

Furthermore, when we look at the overall trading volumes, it becomes more easy to understand why Bitcoin is more susceptible to volatility.

The forex market, for example boasts a daily trading volume of $6.6 trillion in September 2019. By comparison, the crypto market had a 24-hour trading volume of $68 billion for all digital assets, of which Bitcoin accounted for 25% ($17 billion), at the time.

We can imagine that when it comes to order size, forex markets will be able to process larger order volumes more easily without seeing prices jump or plummet, while similar large order volumes can easily cause Bitcoin’s price to fluctuate heavily.

Let's see an example to understand this better.

Say, someone shorts $1 billion of EUR/USD on the forex market.

As the forex market has a daily volume of over $6 trillion and the EUR/USD is one of the most popular trading pairs among major fiat currencies, this single transaction won't have a significant impact on the EUR/USD price.

On the other hand, when a Bitcoin whale sells $1 billion worth of BTC at once, which represents nearly 2.4% of the total 24-hour trading volume ($42 billion), the sell-off will most probably result in a substantial price decrease for the digital asset (or it may even crash the crypto market for a short time).

This also means cryptocurrencies are potentially more susceptible to market manipulation.


The extent to which crypto traders base their actions on speculation also plays a part in driving Bitcoin's volatility.

At a surface level, when traders closely watch the markets, jumping between assets to buy the lows and sell the highs, potentially with leverage, without really investigating the fundamentals or looking at the broader context, this can make for irrational market behavior.

At a deeper level, if people hold, say, Bitcoin, only for speculative reasons – with no intention to use it as digital cash, or in the case of ETH as a means to develop decentralized applications, this can take away from liquidity (in extreme cases), but more importantly, such investors would be more likely to sell off their assets as soon as there is some bad news around it, if only because it is of no practical use to them.

So where do we stand with actual usage?

According to a Chainalysis report, only 1.3% of BTC transactions originated from merchants and 3.9% from (other) peer-to-peer (P2P) activities in the first four months of 2019, suggesting that speculation still remains the leading use-case for Bitcoin.

The Future of Bitcoin's Volatility

We know that Bitcoin is a highly volatile asset. But will it ever become less volatile?

If more people continue to adopt cryptocurrencies and the digital asset ecosystem continues to develop organically, then such would be expected.

If that happens, the crypto market's size could grow and present new real-world use-cases for consumers and businesses alike, while solving the speculation and liquidity issues of the digital asset economy.

Pro-crypto regulation could also help in lowering the magnitude of price swings as it would provide clarity, instill confidence and allow for much more capital from the regulated community to flow into the space.

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