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Hello old friend: Volatility returns (and some thoughts on the Grayscale news)

Notes from the CIO

On August 17, the price of bitcoin (BTC) dropped abruptly and fell over 7%, leading to a decline of over 11% for the week ending August 20. The performance ended a prolonged stretch of calm, with BTC’s volatility having hit an all-time-low just one week earlier. 

A confluence of factors led to this sudden drop, and signs of monetary tightening last week kept prices suppressed. This week, however, volatility returned as markets reacted positively to a US circuit court’s decision regarding Grayscale’s spot bitcoin ETF filing. 

Before going deeper into what this return to volatility means for investors, it’s important to clarify what the Grayscale decision is and—importantly—what it is not. This decision is not an approval of the conversion of the Grayscale Bitcoin Trust (GBTC) to an ETF nor does it require that the SEC approve the conversion to an ETF. The key takeaways from the decision are that the SEC failed to explain its different treatment of GBTC compared to what the court referred to as "similar products," the SEC's arguments fell short of the standard for reasoned decision making, and the SEC's reasons for differentiating GBTC from bitcoin futures ETPs were inadequate. As a result, the court ruled to vacate the SEC order (more on the spot ETF process here).

There are several unanswered questions and potential outcomes. The SEC could appeal the decision, re-issue the denial order with a clearer explanation of its reasons for denying the conversion, or issue a new order that approves the conversion.

As this situation plays out in the coming weeks and market participants get a better handle on what this means for a spot ETF, we are anticipating continued price swings. As we wrote about in the past, price volatility will remain a fixture of bitcoin. However, we want to share some updated perspectives on how investors should view this volatility in the current environment. 

Low volatility for bitcoin is not unprecedented. By looking at BTC's annualized 30-day volatility since the beginning of 2016 we can see that, in addition to a clear trend of lower highs in the past seven years1, BTC's volatility sporadically falls within the 10% to 30% range typical of tech stocks (as tracked by the Nasdaq 100 Volatility Index).  

Bitcoin’s price and volatility, 2016 to 2023 YTD


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Source: Hashdex Research with data from Google Finance (from 12/01/2015 to 08/29/2023)


As is evident from the black lines crossing into the yellow band above, these periods are generally short-lived. So a fair question to ask is, has allocating to BTC during those periods benefited investors? To help answer this, we measured the one-year return of bitcoin for the days where volatility falls within this range and found that, on average, the one-year return has been ~530%. If we calculate the one-year return when allocating to BTC outside this volatility range, the average return was ~160%, a 370% difference. 

The impressive returns in both cases are certainly biased by the tremendous run bitcoin had in the 2016–2017 bull phase, but even if we consider the average returns only from 2019 onwards, the low volatility regime has an average YoY return of ~180%, against ~110% in the high volatility environment. One way or the other, we do think this quick exercise points to an important consideration: low volatility regimes have historically provided above average returns for investors that held a BTC allocation for a full year. As noted above, we are anticipating that the attention around the rush for a spot bitcoin ETF in the US will push us out of the current low volatility environment, so if this trend holds true there may be a window of opportunity for investors with long-term horizons.

Bitcoin’s influence continues to grow despite its periods of large price swings, and the recent trend of accelerating institutional adoption is a clear sign that investors are comfortable with its volatile nature. We believe its position as an attractive long-term investment only strengthens in the wake of down markets, and while price volatility will be part of the crypto markets for the foreseeable future, we remain steadfast in our belief that the long-term outlook for bitcoin has never been stronger.


[1] With the exception of the March 2020 COVID-19 selloff.




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