Volatility and Correlation: Bitcoin vs Gold, Fiat, and Equity Markets

By Sacha Ghebali and Olivier Mammet

Following the effects of COVID-19, market volatility has gone up over the past months. After strong market swings at the end of the second week of March, investors and politicians are still facing uncertainty on the repercussions of the health crisis on the economy. How does historical volatility compare across asset classes? Assets taken from crypto, gold, FX and equity markets are analyzed from January to May 2020.

Main takeaways

  • Whilst the historical volatility of BTC/USD returned to levels comparable to January 2020 in May, it has almost doubled in the wake of the Bitcoin halving.
  • The ratio between Bitcoin’s volatility and that of equity markets remains lower than in January.
  • From mid March until the end of April, Bitcoin’s volatility was only slightly higher than that of the S&P 500. The ratio between the two was steady over that period.
  • Strong correlations of the volatility evolution can be found on FX markets, with the exception of JPY whose evolution resembles more that of Bitcoin.
  • The correlation between Bitcoin returns and equity returns had consistently been above 50% after March 12th but started going down in May, reaching slightly negative territories on May 15th.

Important note: All historical volatility calculations are performed using only days where all markets considered are open and trading. The methodology, described in this article, consists of an exponentially weighted moving average with a decay factor of 0.8.

Bitcoin vs Gold vs Fiat vs Equity

First, a general comparison between the four asset types is shown in Figure 1. As expected, Bitcoin has the highest volatility, followed by the S&P 500, Gold and then the DXY (U.S. Dollar Index which measures the strength of the dollar relative to a basket of currencies).

Figure 1: Annualized volatility for Bitcoin, S&P 500, DXY and XAU (Gold).

Next, the ratio between the volatility of Bitcoin relative to the volatility of other assets is shown in Figure 2. On March 12th and during the few days preceding Crypto Black Thursday, this ratio was at its lowest point over the entire period studied. Although the ratios have gone up since the halving, the ratio between Bitcoin’s volatility and the S&P’s remains lower than in January.

Figure 2: Volatility ratio between Bitcoin and other asset classes.

Bitcoin vs S&P 500

Figure 3 takes a closer look at the evolution of the historical volatility of Bitcoin and the S&P 500. It shows that in spite of the peak in volatility due to the March 12th event, the volatility spread between the two assets was very tight during the whole month of April. Recent figures show a reversal of this effect, with the volatility of Bitcoin increasing while the volatility of equities is on a downward trend.

Figure 3: Closer look at the historical volatility of BTC/USD and S&P 500.

Bitcoin vs Fiat

Using the same methodology, the historical volatilities of main currencies (US Dollar index, JPY, CHF, EUR) are shown in Figure 4. As seen above, the volatility of Bitcoin is understandably much greater than that of fiat currencies so the volatility of the crypto asset is shown on a separate axis (black dashed line). The DXY, EUR, and CHF show very similar evolutions of their volatility whereas JPY stands out with a sharper volatility spike on March 11th, followed by that of Bitcoin on March 12th.

Figure 4: Comparison of Bitcoin (BTC/USD) volatility to that of FX pairs. Dashed line: BTC/USD historical volatility (left axis); Continuous lines: FX pairs historical volatility (right axis).


Finally, the correlation between Bitcoin returns and other assets is shown in Figure 5. The sign of the correlation between Bitcoin and the S&P 500 reversed from January to March, evolving from a low of -75% to a high of 75%. Although it started at around 50% in may, this correlation dropped below zero last week. Despite the noise due to the choice of the decay factor which places more weight on recent events, correlations between Bitcoin and other traditional assets appear to have decreased significantly.

Figure 5: Exponentially weighted correlation (decay factor of 0.8) between BTC/USD and ETH/USD, S&P 500, DXY and XAU.

Volatility and Correlation: Bitcoin vs Gold, Fiat, and Equity Markets was originally published in Kaiko Data on Medium, where people are continuing the conversation by highlighting and responding to this story.

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