Volatility An Important Factor For Institutional Adoption Of Bitcoin

News, Opinion | May 10, 2021 By:

Bitcoin prices could surge even higher if volatility continues to decline, according to one firm. However, it remains to be seen whether the recent decline in volatility will continue, as, in February, one measure of volatility hit a 10-month high.

Institutional investors want less volatility

In a recent note seen by Business Insider, JPMorgan analysts said that bitcoin’s price volatility has been falling in recent weeks, which makes it more appealing to institutional investors looking for low-correlation assets.

Bulls argue that the recent bitcoin rally has staying power because it’s been supported by institutional investors rather than retail. If even more institutions dive into the cryptocurrency, the price could soar much higher. JPMorgan analysts believe institutional adoption of bitcoin will likely increase due to the “recent change in the correlation structure of bitcoin relative to traditional asset classes.”

Holding back many institutions from buying bitcoin is the extreme volatility, which surged last year as the bitcoin price more than tripled. JPMorgan analysts explained that high volatility is a “headwind towards further institutional adoption” due to risk management.

If volatility in the bitcoin price did indeed decline in March, as JPMorgan argues, it marks a significant turnaround from the month before. According to Forbes, Blockforce Capital tracks bitcoin volatility and says that its annualized 30-day volatility hit 114.51% on Feb. 8, the highest reading since Apr. 10, 2020. The historical 30-day volatility is 63.78% looking back to 2013.

Bitcoin versus gold

JPMorgan analysts said the growing enthusiasm had negatively impacted gold for bitcoin among institutional investors. They noted that gold funds had seen $20 billion in outflows since the middle of October. Meanwhile, bitcoin funds have seen $7 billion in inflows during the same timeframe.

JPMorgan analysts pointed out that due to how significant the financial investment into gold is, “any such crowding out of gold as an ‘alternative’ currency implies big upside for bitcoin over the long term.” They set their long-term price target for bitcoin at $130,000, suggesting a 121% upside from current levels.

The JPMorgan team explained that the bitcoin price would have to soar to $130,000 to “match the total private sector investment in gold,” based on the gold price at $1,700 per ounce. Previously, their long-term price target for the cryptocurrency was at $146,000, but it has declined as the gold price gradually fell from its peak of $1,900 an ounce.

Volatilities will converge

The analysts explained that the falling gold price has “mechanically reduced the estimated upside potential for bitcoin as a digital alternative to traditional gold.” That assumes “an equalization with the portfolio weight of gold.”

Their long-term bitcoin price target assumes that the cryptocurrency’s volatility will fall to levels similar to gold’s. That’s still a long way from being the case, as gold’s three-month realized volatility is at 16%, compared to bitcoins at 86%.

JPMorgan analysts noted that bitcoin’s and gold’s volatility levels would not converge quickly and expect it to be a multi-year process.

How to take advantage of bitcoin volatility

Until bitcoin’s volatility comes down, there could be opportunities to take advantage of it using a cryptocurrency exchange like OKEx or one of the many others out there. The bitcoin price currently stands at about $59,500, but many crypto enthusiasts expect the price to continue soaring.

According to Coindesk, bitcoin bought between $10,800 and $58,800 represent one-quarter of the total supply, which indicates that many holders are sitting on multiple-per cent gains. In the meantime, many of these crypto enthusiasts have continued to accumulate bitcoin, driving the price higher and higher.

Cryptocurrency exchanges allow you to buy bitcoin and trade it if you decide to lock in gains quickly instead of holding it long-term like many so-called “HODLers” (hold on for dear life).