About a week ago (December 10), the cryptocurrency circle was celebrating the first time that Bitcoin broke through the 100,000 mark. A few days later, a sudden drop occurred, 590,000 people were liquidated, and 1.7 billion US dollars were liquidated, setting a record for the amount of Bitcoin contract liquidations, even exceeding the 312 incident in 2020, when the price of BTC collapsed by 50% in one day.
When it comes to Bitcoin, whether you are a veteran in the cryptocurrency circle or a newcomer, you must always be vigilant about the volatility of Bitcoin.
How big is the volatility of Bitcoin? This article will review the data of the past five years and provide a rough numerical reference. Bitcoin investors can then evaluate the risks they can bear and calculate the amount they can invest based on the volatility of Bitcoin. This article can be regarded as a must-know before investing in Bitcoin! You must first understand the risks before calculating the scale of investment. If you are a trader who is used to opening leverage, this is a must-read! The volatility is highly correlated with the reasonable leverage multiple. Understand how much risk of liquidation you are taking.
Comparison of volatility between Bitcoin and traditional financial assets
Fidelity Digital Assets, the cryptocurrency subsidiary of financial giant Fidelity Investments, published an article on Bitcoin volatility in May this year.
As an asset class, Bitcoin is three to four times more volatile than many stock indices, which are already relatively volatile asset classes in traditional financial portfolios.
Traditionally, the more aggressive the portfolio, the more stocks it will allocate because stocks are more volatile, but that is the traditional situation. Compared with Bitcoin, the volatility of stocks is very conservative.
Bitcoin skyrocketed - up more than 20,000% in 10 years
Speculators love volatility, and the more volatility there is, the more opportunities there are. But for investors, volatility is not necessarily a bad thing. If Bitcoin did not have such great volatility, the 28,000% increase in ten years might not have happened.
Bitcoin plunges - biggest one-day drop of 52%
High volatility is not only a sign of a high rise, but also a sign of a terrible fall. The most frightening crash of Bitcoin in recent years occurred on March 12, 2020.
According to the data from Wei’an Exchange, Bitcoin opened at 7934 on March 12 and fell to a low of 3782 on March 13, a drop of 52.3% in just 28 hours.
How big is the daily volatility of Bitcoin?
Important: This is not the average of daily gains and losses! What is assessed here is volatility, which is the fluctuation ratio between the highest and lowest prices of each day.
Formula = (highest price of the day - lowest price of the day) / opening price of the day
Deducing the affordable investment scale from volatility
Over the past five years, Bitcoin’s average daily volatility has been 4.59%, which may not seem high at first glance. However, there have been 112 days with volatility exceeding 10%, accounting for 6.2% of trading days.
How to understand this data?
To put it simply: If you always use 10x leverage, you may get liquidated once every 16 days on average. If you use more than 25x leverage, you may get liquidated every day.
(This is just a simplified statement to remind you of the risks. In fact, whether a position is liquidated or not is affected by the entry position, the long and short directions, etc. It does not mean that a position will be liquidated if the volatility reaches the standard.)
Even in the bull market of 2021, there was a single-day drop of 30%. The bull market does not rise every day and celebrate the New Year every day. It is true that "there are many pins in the bull market".
For speculation, understanding volatility helps us set more reasonable leverage ratios and stop-loss and profit-stop ranges; for investment, even if all spot stocks are used without leverage, understanding volatility can help us calculate the possible losses we may bear. , to estimate the appropriate investment scale.
For example: You have a total of 1 million yuan to invest, and the maximum loss you can bear is 200,000 yuan. Based on the largest single-day drop of Bitcoin in the past five years, -43%, you can invest a maximum of 465,000 yuan to buy Bitcoin, and the remaining 535,000 yuan can be placed in a time deposit (or stable currency investment).
Reference: Bitcoin historical volatility
However, as the scale of Bitcoin grows, volatility has shown a downward trend in the long run.
This is the 30-day annualized volatility of Bitcoin. The formula is to first calculate the standard deviation of daily volatility over 30 days, and then annualize it (taking the square root of the number of trading days in the previous year).
This website provides both 30-day and 60-day volatility, and calculates the 30-day or 60-day volatility standard deviation, but does not annualize it.
The difference between the numbers on the two websites lies in the annualized calculation.
Is Bitcoin still a highly volatile asset?
Fidelity Subsidiary 2024 Research Report - Bitcoin Volatility Is Lower Than Netflix
As mentioned earlier, Bitcoin, as an asset class, has higher volatility compared to other asset classes. For example, Bitcoin's volatility is more than three times that of the S&P 500. However, if compared with individual stocks, there are actually many well-known stocks that have higher volatility.
The report points out that in the past 90-day volatility, 92 stocks in the S&P 500 have higher volatility than Bitcoin. At the beginning of this year, the Bitcoin ETF was approved. Under the leadership of MicroStrategy, more and more companies have begun to build Bitcoin asset reserves. The participants of Bitcoin are very different from the past. As the Bitcoin market matures and the number of participants gradually increases, the volatility of Bitcoin may continue to decline in the long run.
As an asset class, Bitcoin is a highly volatile asset
As an individual investment, Bitcoin is already less volatile than many stocks
Before investing in Bitcoin, learn to respect market volatility
If it is not an investment but speculation, it is even more necessary!
We must know that we are buying a highly volatile asset. If we do not control our funds well and accidentally invest an amount beyond our ability, the market may really make us go to zero or bankrupt one day. Don’t invest in Bitcoin with a fluke mentality. , long-term holding may be the most suitable method for most people.