Bitcoin Volatility Decline Could Attract Greater Institutional Adoption

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In Brief
  • Bitcoin’s recent drop in volatility could see more institutional investors getting involved.

  • Three-month volatility has fallen to 86%, while six-month measure stabilizing around 73%.

  • Goldman Sachs and other established names in finance have applied to offer Bitcoin ETFs.

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Bitcoin’s volatility has dropped recently, which could result in increasing adoption from institutional investors, according to JP Morgan analysts.

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After spiking above 90% in February, the three-month realized bitcoin volatility dropped to 86% in March. The six-month metric has also leveled out at around 73%.

“These tentative signs of bitcoin volatility normalization are encouraging,” JP Morgan strategist Nikolaos Panigirtzoglou said in a report. “In our opinion, a potential normalization of bitcoin volatility from here would likely help to reinvigorate the institutional interest going forward.”

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Bitcoin’s volatility has been a key metric that has made many institutions hesitant to engage with it. The higher the volatility of an asset, the higher the risk that invested capital will be lost. The diminishing figure could see more institutional investors warm up to the asset.

Another contributing factor to this growing interest could be bitcoin changing correlation with more traditional assets, JP Morgan strategists pointed out. The correlations have increasingly diverged, “making bitcoin a more attractive option for multi-asset portfolios for diversification point of view and less vulnerable to any further appreciation in the dollar.”

Bitcoin ETFs

Despite the hesitancy of institutions, many are finding mounting customer demand too hard to ignore. Last month, the Chicago Board Options Exchange (Cboe) Global Fund filed with the U.S. Securities and Exchange Commission (SEC) to list the proposed Bitcoin exchange-traded fund (ETF) from VanEck.

This will be the company’s latest attempt in a string of efforts to offer crypto-based assets. “We’re still interested in the space, we haven’t given up on it,” CEO Ed Tilly said. “There’s a lot of demand from retail and institutions, and we need to be there.” 

Both Goldman Sachs and Fidelity Investments filed for bitcoin ETFs with the SEC. Goldman Sachs filed the application on March 19, while Fidelity filed a few days later on March 24. Bitcoin’s shrinking volatility could see many more follow suit.

Stealing Gold’s Thunder

JP Morgan analysts also noted that bitcoin’s recent growth had come at the expense of gold. They cited $7 billion of inflows into bitcoin funds while $20 billion flowed out of gold-based ETFs.

This sentiment had earlier been shared by Soros Fund Management CIO Dawn Fitzpatrick. Gold has traditionally done well during inflationary periods as a hedge against the dollar’s diminishing value.

However, Fitzpatrick remarked that gold has recently struggled more than in the past. “I think that’s because bitcoin is taking some of its buyer base away,” she explained.

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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