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Are cryptocurrencies becoming less volatile?

It has been 13 years since Bitcoin introduced a new era of blockchain technology. Though that is quite a long time, it is relatively young compared to other financial asset classes such as equities, bonds, and commodities.

Subsequent crypto-asset technologies, or altcoins, are far younger than Bitcoin, some of which have not yet seen the tender age of half a decade. Yet the industry has propagated globally and continues to grow on a long-run trajectory. Volatility can customarily represent a hallmark of an industry’s adolescence. The younger the industry, the greater the average volatility. The more mature the industry, the lower the average volatility. It is acknowledged, however, that industries may undergo periods of higher volatility due to exogenous shocks, but it is assumed that the long-run mean volatility constitutes a surrogate of market maturity. Hence, the question beckons: Are cryptocurrencies approaching maturity? And can we use a time-series measure of volatility to answer this question?

The EC10 is an index tracking bundle representing the top 10 cryptocurrencies. Not only is it an investable instrument, but it can also be used to gauge the weighted market-cap movement of cryptocurrencies in financial markets, and thus resembles a significant portion of the market’s sentiment. Therefore, the volatility of the EC10 can be used as a proxy for the volatility of the sector. The chart below shows the volatility trend of the EC10 as a function of time.

The graph above shows the bi-annual EC10 volatility trend over the past 4 years. The first noticeable trend is that the volatility of the sector has gradually decreased over the period 2018/06/01 to 2022/03/14. Notably, the downside deviation also known as downside volatility (or downside risk) was less than the total volatility (standard deviation) over the period. More notably, the downside deviation decreased at more than twice the margin than the standard deviation. This shows that the downside risk of the sector is decreasing at a greater rate than total volatility. The observation supports the notion of a long-run upward trend in the sector and suggests cryptocurrencies are indeed approaching maturity. The analysis is not necessarily sufficient to determine how close to shakeout or maturity the sector is. However, there are other metrics suggesting the sector remains in a predominantly early adolescent phase of growth. Here’s why:



There are approximately 200 million active crypto users around the globe. For global proliferation to truly take place would require at least a 5 - 6 billion user adoption base. If the crypto user base were to expand to 5 billion users, it would be 25 times more active than it is today. This point suggests crypto is likely still in the early growth phase of its industry life cycle. The second factor suggesting crypto resides in an adolescent phase of its growth is that many major economies have not yet provided a formal regulatory framework for crypto assets, and thus the vast majority of corporate investors have not yet received the legal mandate to invest. Once regulatory clarity emerges, the industry is expected to experience a significant influx of capital flows.

In summary, the EC10 data show us cryptocurrencies are becoming less volatile. We can see the crypto asset sector exhibited a gradually sustained decrease in volatility, with downside volatility having decreased twice as much as total volatility. This suggests the sector is approaching maturity with a strong long-run upward trend. However, it is hard to say with certainty in which stage of the growth cycle the industry resides. There are indicators suggesting the crypto asset sector is in the early stage of its growth cycle, such as the relatively small global userbase, and the current level of regulatory ambiguity across sovereign nations. As the user base grows, and regulatory consensus emerges, the industry is expected to continue its burgeoning trajectory and perhaps become commonplace as our planet’s global reserve currencies.