In their brief history, cryptocurrencies have been among the most volatile widely traded assets ever seen. But how do cryptocurrencies compare with each other on simple metrics of volatility? Do some fluctuate in price more than others?
Earlier this year, we compared the volatility of bitcoin to that of traditional currencies. We found that the average daily percentage change and the standard deviation of bitcoin’s exchange rate with the U.S. dollar were several times higher than the dollar exchange rate against the euro, yen, pound, and gold.
Now we find that bitcoin is consistently less volatile than four other widely traded cryptocurrencies: litecoin, ripple, ethereum, and Bitcoin Cash. Looking at simple measures of volatility across digital assets also reveals some common patterns over time and interesting potential trends.
A medium of exchange that is stable in value and highly liquid, so someone can trade it in a pinch without taking a hit, allows us to better deal with uncertainty and helps us plan and coordinate into the future. Assets that are too volatile are therefore undesirable as currencies.
While all five cryptocurrencies we study are still quite new, measures of volatility, and changes in those measures over time, are important in assessing their potential future viability as money.
Good, Old, Dependable Bitcoin?
Economists and statisticians measure a variable’s volatility in many ways. We choose a relatively simple metric: the average daily percentage change in price. We average the absolute value of daily percentage returns for each cryptocurrency and year. Using the absolute value lets us count positive and negative changes equally. We want changes of +3 percent and −3 percent to average to 3 percent, not zero.
We analyzed data from CoinMarketCap.com that go back to April 2013 for bitcoin and litecoin, and the start date of trading for the other three cryptocurrencies, in part based on research by Berkshire School’s Catherine Udodova and Jack Martin.
By our measure, in every year, bitcoin is the least volatile of the five cryptocurrencies we study. bitcoin reached its lowest average daily price movement, less than 2 percent, in 2016, before rising again to around 4 percent both in 2017 and 2018.
Generally, other cryptocurrencies appear to have started out much more volatile in early years or when they began trading, and converged toward bitcoin’s level of volatility later in the sample period. For instance, in 2013 ripple’s average daily price movement was a full five percentage points higher than bitcoin’s (9 percent compared to 4 percent), but less than one point higher in 2016 (both had less than 2 percent). The exception is 2017, when all cryptocurrencies except ethereum saw significant upticks in average daily price movement.
Big Changes Are the Norm
In our earlier work, we reported that average daily price movements for traditional currencies are mere fractions of a percentage point. While cryptocurrencies exhibit larger price changes day-to-day, their higher volatility is really driven by “fat tails,” or the frequent occurrence of days with extremely large price swings.
None of the benchmark assets—euro, yen, pound, or gold—had a single day since 2013 with a change in USD exchange rate greater than 10 percent, the largest single-day change was an 8 percent drop in the pound against the dollar after the Brexit vote.
Contrast this record with Bitcoin Cash, which has averaged well over one day per week with a change greater than 10 percent in its 11-month history.
Once again, bitcoin comes in lower than the other cryptocurrencies in this measure of volatility, though it still far surpasses traditional currencies.
Max Gulker is a senior research fellow at the American Institute for Economic Research. Gulker holds a doctorate in economics from Stanford University and a bachelor’s in economics from the University of Michigan.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.