Measuring Bitcoin’s Volatility and Correlation with Traditional Assets
Summary
The article examines how Bitcoin and Ether moved relative to equities, foreign exchange, and gold during 2020. It explains volatility as a measure of price variation and correlation as a consideration for diversification, while warning that estimates can be difficult to interpret during rapidly changing market regimes.
For its calculations, the analysis uses exponentially weighted estimates based on the RiskMetrics approach, with a decay factor of 0.94 so recent observations count more than older ones. It reports that Bitcoin’s relationship with equities strengthened after the March market crash, while its correlation with gold remained low; Ether’s correlation with Bitcoin also varied during the year. Volatility comparisons highlight the March liquidation-driven spike and subsequent changes. These are historical observations from a volatile, nonstationary period, and short-term correlations alone do not establish stable relationships or explain their causes.
Key ideas
- Exponential weighting gives recent returns more influence in volatility and correlation estimates.
- Bitcoin’s correlation with equities rose after the March 2020 crash and remained elevated for a period.
- Bitcoin’s correlation with gold stayed low in the period covered.
- Ether and Bitcoin were strongly correlated for part of 2020 before a brief decoupling.
- Historical correlations can shift across regimes and should not be treated as stable evidence of diversification.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.