Without developed options markets, it can be hard to track and trade bitcoin implied volatility, but investors and traders can also reference historical volatility.

A representation of virtual currency Bitcoin.

Cryptocurrencies have come to define extreme volatility, and rightly so. Between April 2013 and April 2018, bitcoin (/BTC) suffered four separate corrections of at least 50%, as well as 18 other corrections that saw it drop in value by at least 20%. 

That level of volatility takes on new meaning when one considers that the S&P 500 has only experienced three corrections of more than 50% in the last 90 years.

As an emerging asset class, cryptocurrencies might be expected to be more volatile, but can that volatility be precisely quantified?

Before answering that question, it’s important to recall that volatility is typically broken down into two different categories: implied volatility and historical volatility.

As most traders and investors already know, implied volatility represents the current market price for volatility based on the market’s expectations for future movement in a given underlying. This value is “implied” by the dollar-and-cents value of options trading in the marketplace.

Realized volatility, on the other hand, is the actual movement that occurs in a given underlying over a defined historical period of time. Volatility traders obviously care not only about what is expected to occur, but also what actually transpired.

The problem with cryptocurrencies is that options markets on such assets aren’t yet fully developed. As a result, the implied volatility of a cryptocurrency such as bitcoin can’t be easily (or accurately) derived.

That means the market’s expectation for volatility in bitcoin and other cryptocurrencies remains largely a mystery. 

On the other hand, historical (aka realized) volatility can be calculated using historical trading data. So while implied volatility isn’t known, historical volatility can at least be used as a point of reference.  

A comprehensive analysis of bitcoin’s historical volatility (i.e. actual volatility) was conducted recently by the tastytrade financial network and presented on a new episode of Market Measures.

As highlighted in the chart below, the 30-day historical volatility of bitcoin has averaged about 64% using the last 12 months of historical trading data. According to that same analysis, current 30-day historical volatility in bitcoin is quite a bit higher, at 104%. 

For the purposes of comparison, it’s important to note that the current 30-day volatility of the SPDR S&P 500 ETF (SPY) is 26%, suggesting bitcoin’s volatility at this time is roughly four times greater than that of the S&P 500.

Furthermore, using the current historical volatility of bitcoin (104%) as a substitution for implied volatility, the tastytrade research team estimates that the 30-day expected range in bitcoin is approximately +/- 8%.

However, one has to keep in mind that historical volatility rarely mirrors implied volatility precisely. The former reflects actual movement in the underlying, whereas the latter reflects the market’s collective expectation for future movement. These two figures often vary widely, especially when “fear” enters the market.

Regardless, with bitcoin currently trading at $37,338.60, that +/- 8% figure implies the cryptocurrency will trade somewhere between $34,351.52 and $40,326.40 over the next 30 days with 68% certainty.

Furthermore, one can infer that bitcoin will trade somewhere between $31,364.44 and $43,312.76 over the next 30 days with 95% certainty, and somewhere between $28,377.36 and $46,299.84 over the next 30 days with 99% certainty.

These ranges and probabilities are for illustrative purposes only because they are based on using historical volatility in place in implied volatility. It’s possible—and likely—that a robust bitcoin options market would reflect a much higher level of implied volatility. 

For example, if 30-day implied volatility was twice as high as 30-day historical volatility (104 x 2 = 208%), those ranges would effectively be doubled. Ultimately, that would indicate the market expects bitcoin to trade between $19,416.08 and $55,261.12 over the next 30 days, with 99% confidence.

It’s certainly an interesting exercise to consider one’s own expectations for the range in bitcoin over the next 30 days.

One would guess the market’s actual expectation for bitcoin volatility over the next 30 days would be higher than the historical 30-day volatility, but less than double that amount—somewhere between 104% and 208%—if that information could be known. 

For more information on bitcoin volatility, readers can review the complete episode of Market Measures when scheduling allows. To follow all the daily action in the financial markets, TASTYTRADE LIVE, weekdays from 7 a.m. to 4 p.m. Central Time, is also recommended. 

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Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.