Ecoinometrics - April 12, 2021

Volatility...

Apr 12, 2021

So far in this 3rd halving cycle Bitcoin’s volatility has remained under control. Is it a sign of things to come?

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Done? That’s great! Now let’s dive in.

Volatility

One word that comes up all the time when discussing Bitcoin is volatility. And one big question when it comes to volatility is whether or not it is in the process of normalizing.

If you try to guess where volatility is going, you might come up with the following scenario:

During the adoption phase, with a small market cap, the volatility of Bitcoin should be high. That’s the result a low liquidity and high demand.
As the market gets larger with a more diversified set of participants the volatility should progressively come down as liquidity improves.
At the point where you reach the top of the adoption curve Bitcoin should not be significantly more volatile than any other asset after correcting for the fact that Bitcoin operates 24/7 without circuit breakers in a decentralized fashion.

Obviously getting to the last step takes time. We are twelve years in and there is a lot more room for adoption. But with Bitcoin now at a market cap similar to the largest public companies in the world we are making good progress.

So where is the volatility at?

Well the one month realized volatility is coming down. At the height of the initial push this year BTC one month realized volatility managed to climb back above 100% from the lows of 2020.

But that didn’t last and we are now back to 54%.

Check it out.

That’s not to say 54% is particularly low historically speaking.

Actually when you look at the distribution of the one month realized volatility 54% corresponds to the peak of the historical distribution. So while it is a bit lower than the average volatility there is nothing exceptional going on.

You can see that on the graph below:

Each point is Bitcoin’s one month realized volatility on any given day since the 1st halving.
The taller the distribution the more days have been at this level of volatility.
The darker the distribution the closer you are to the average volatility.
The vertical orange line is the current volatility.

Alright so there is nothing exceptional about the current situation. The bull market is taking a pause so the volatility is taking a dive.

But what about this 3rd halving cycle as a whole? Is it the case that, slowly but surely, volatility is decreasing?

I’d say it might be a bit early to tell. After all we aren’t even yet at the first anniversary of the 3rd halving.

Roughly though it does seem to be the case that volatility is shrinking.

If you split up the previous chart between each halving cycle you can see the following.

It’s all about the right tail:

After the 1st halving, the realized one month volatility peaked around 330%.
After the 2nd halving, it peaked around 200%.
After the 3rd halving, so far, it has peaked at 120%.

So yes, there seem to be less extreme volatility events in each cycle.

But to be fair most of those volatility spikes happened during the last phase of the bull market in each cycle. We are not there yet… let’s see how that plays out.

MacroEcoinomics

Looking past the volatility, Bitcoin continues a 30 days consolidation below $60k.

There are signs BTC is trying to break out but we haven’t had any convincing move above $60k that lasted more than a few hours yet.

This is pretty similar to the effort it took to move above $10k last summer. Remember that after it happened the $10k resistance level proved to be a great launch pad for the next leg of the bull market.

In other markets the US 10-year yield is also taking a break. Apparently everyone likes that since even gold managed to climb by almost 1% last week.

That being said the situation hasn’t really changed. Inflation worries are going to stay with us as long as the Federal Reserve together with the US Treasury think debt monetization is a good idea.

Unless real rates take a nosedive when inflation really shows up in the data, this is not good for gold.

But as long as rising rates don’t trigger a liquidity event there is no reason to think that Bitcoin will be affected.

Crypto policy

Here is an interesting report about HSBC apparently preventing Canadian customers to buy stocks of companies that have exposure to Bitcoin.

That seems… strange. I mean at this point Canada has like no less than three Bitcoin ETFs, yet HSBC doesn’t want its customers to buy MicroStrategy.

Specifically the bank says that:

“[HSBC] will not participate in facilitating (buy and/or exchange) products related to virtual currencies, or products related or referencing to the performance of virtual currency.”

That definitely means no Bitcoin ETF and apparently no MSTR. The latter is consistent though since MicroStrategy is essentially a pseudo-ETF.

But “products related to or referencing” is so vague that it could be anything: Square, Tesla, PayPal… any company that accepts payments in BTC...

Someone in compliance at HSBC Canada apparently decided that they don’t want to touch any stock related to crypto and they’ve kept their options open with a policy as vague as possible.

That certainly looks like a backward policy. But HSBC is known for not being crypto friendly to say the least.

Come back in 10 or 20 years and banks will cry while wondering why they got disintermediated…

Read the article.

In ECB we trust

Isabel Schnabel from the European Central Bank is bashing Bitcoin. This time she came up with a revolutionary new argument against BTC that will certainly transform the way you are thinking about it.

Are you ready? Are you sitting down?

“[Bitcoin is a] speculative asset without any recognizable fundamental value and is subject to massive price swings.”
Isabel Schnabel

Shocked!

Honestly that kind of old argument might work on my grandmother but for everybody else it is going to take more effort than that.

If you managed to move past this quote there is an interesting second part in this article regarding our favourite topic around here i.e. Central Banks Digital Currencies.

In essence here is what the ECB is saying:

In a world where cash is replaced by centralized digital currencies, the entity that operates the currency gets a LOT of information and control over you.
Surely you wouldn’t trust say Facebook as a private entity to have so much control over your money.
But if instead of Facebook it is the ECB who knows everything about you and has complete power over what you can do with your money then everything is fine I guess.

I’m assuming Isabel Schnabel said that unironically…

I mean really think about it. The thing coming on the horizon is the creation of a digital Euro where the model is that:

The ECB has total control over digital money in Europe.
Each European citizen has an account directly at the ECB.
European citizens have virtually no control over the ECB.

So it feels like what Isabel Schnabel is really saying is choose your poison.

Get owned by a private company or get owned by the central bank.

Thank god there is a third option. Opt out of the system, hedge your bet with Bitcoin.

Read the article.

That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.

Cheers,

Nick