One of my favorite arguments advanced by cryptocurrency enthusiasts is that the various digital money systems, and most notably bitcoin, are a great future potential store of value. Clearly, the crypto enthusiasts have in mind usurping the age-old store of value, namely gold. Optimism towards bitcoin has been lifted in the last few months as prices started to creep back upwards. But I’m not entirely convinced that comparing gold with bitcoin 9or any digital currency) makes much sense. Why? Volatility. Bitcoin prices might have stabilized a bit and started creeping up but most conventional measures of price volatility suggest that cryptos are insanely volatile. Bloomberg for instance reported recently bitcoin volatility has grown significantly and averaged 4.5% in May as compared to 3.5% in April and 1.1% in March. This is the highest level on record since December 2018, when volatility hit 4.2%. Bloomberg also confirmed that volatility has increased within the trading bands – the spread between upper and lower price range levels. “When volatility gets high it should be indicative of extremes in price. The market is getting a bit stretched here from a trader’s standpoint,” Bloomberg Intelligence analyst Mike McGlone reported.
What’s even more curious is that bitcoin volatility looks like it might be beginning to move in step with equities. The chart below is from Bloomberg as well and only goes to the end of March, so it’s an incomplete record. But a pattern might be emerging.
If we turn to gold, an entirely different story emerges. Gold price volatility is measured by a number of futures contracts most notably the CBOE and their GVZ measure. This measures “the market’s expectation of 30-day volatility of gold prices by applying the VIX methodology to options on SPDR Gold Shares (Ticker – GLD). “ Over the last five years this measure was trending between 15 and 20 but then from the spring of 2017, the volatility measure stepped down noticeably. The more recent trading range has been between 10 and 15 with the index sometimes moving into the single digits. It is currently just above 10. You can see the chart in detail HERE. See http://www.cboe.com/delayedquote/advanced-charts?ticker=GVZ
We can also see the subdued volatility in the last chart below which is for the Comex futures price over the last five years. Gold seems to be trading well above recent trend lines but 20 day volatility as measured in the lower part of the chart has fallen noticeably.
So, let us summarise. Bitcoin might have recovered some of its own mojo but it’s become more not less volatile.
Stores of value generally need to boast low volatility, which bitcoin clearly doesn’t possess.
Gold, by contrast, has become less volatile in price and thus a potentially more stable store of value.
Do we honestly believe that long term gold investors will be contemplating cutting their holdings of the shiny stuff to invest in cryptos? I think not.