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Crypto volatility eased in 2019, but it is still too much for most investors - report

By Amanda Cooper

Price volatility for Bitcoin and other digital coins tailed off last year but some believe it is still too high for most investors

Volatility in the crypto-currency market dropped significantly over the course of 2019, but price swings in this market are still, on average, too large for more mainstream investors to become more actively involved, according to a monthly market report from crypto prime dealer SFOX.

Bitcoin proved to be the star performer from among the major asset classes in 2019, having essentially doubled in value to trade around $7,450 (£5,712, €6,705).

Most traders would leap at the chance to capture a near-100 per cent increase in price, but Bitcoin’s ascent in 2019 was anything but smooth, swinging from a low of $3,422 to a peak of $7,455, suggesting that even the world’s biggest digital currency by market capitalisation still has some way to go to being able to lure in more risk-sensitive players.

Historical volatility, or how much the price of an asset moves over the course of a trading day, can act as a double-edged sword.

On the one hand, high volatility offers traders the chance to net big rewards if the bet on a market is correct, but it can also wipe out any profits in the blink of an eye.

“While some traders may be drawn to crypto for its renowned volatility, there has also been discussion in the past as to whether this volatility may detract from some of crypto’s long-term utility — for instance, it’s not clear whether Bitcoin can be useful as a store of value (analogous to gold) if it remains highly volatile,” SFOX said in its January market report.

SFOX noted that Bitcoin opened 2019 with historical volatility at an eye-watering 70.2 per cent, which dropped to around 18 per cent a few months later, only to ramp up to over 100 per cent by the middle of the year. By the end of December, this figure had subsided to around 32 per cent.

As a comparison, the S&P 500 ended 2019 with historical volatility of just 3 per cent, while gold logged around 8.5 percent.

Unlike day-traders, longer-term investors, such as funds, tend to take a more “Goldlilocks-like” view of volatiltity - not too much, and not too little.

As the cryptocurrency market matures, volatility will, inevitably, decrease.

That seems to be the expectation of renown Bitcoin bull Michael Novogratz, who on Dec 28, tweeted that he expected BTC to finish 2020 at $12,000. This would imply a gain of “only” 60 per cent, suggesting even he expects price action to perhaps be a little more muted.

Another factor making the crypto market a trickier one to enter is the fact that the major digital currencies have little, or no, correlation with other asset classes. For example, spot gold and the US dollar are almost perfectly inversely correlated, meaning that a drop in the dollar will, more often than not, occur at the same time as the price of gold is rising.

Correlations are measured on a scale of 1.0, for a fully positive correlation, down to -1.0, for a fully inverse, or negative, correlation.

Bitcoin is strongly positively correlated with the likes of Ethereum, or Litecoin, with readings of 0.7 and 0.8, respectively. But beyond the crypto asset class, there is little to hold on to. The correlation with the S&P 500 is around 0.1 and with gold it is just 0.2.

This would suggest that while there is a small tendency for Bitcoin to move in line with either the S&P or gold, there is only a very loose connection between them.

FURTHER READING Bitcoin price prediction January 2020

FURTHER READING Bitcoin price prediction 2020

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