How does bitcoin's price volatility compare to commodities/stocks with comparable market capitalizations?

Bitcoin's long term (after 21 million units have been created) market cap is about $102 million.

Price volatility of individual commodities/stocks is inversely correlated with their market cap, so price volatility is to be expected with bitcoin, but relative to commodities/stocks with similar market caps, does it have a volatile price?

I'm guessing that price volatility for bitcoin would be low relative to commodities and stocks with comparably sized markets because it has lower transaction costs allowing for a more liquid market, and I'd like to know if the data shows this to be the case, but I don't know where to start looking as I'm not very familiar with commodity and stock markets and trading.

exchange-rate

Amin

Posted 2012-04-01T04:43:23.700

Reputation: 1 452

1I don't know of any data but I would guess it is higher, since its valuation has a more significant speculative component. I also don't think the costs of -trading- bitcoins is lower than for other assets. – Meni Rosenfeld – 2012-04-01T08:07:16.303

1Good point on the speculative aspect of it. The cost of trading bitcoin I think is quite low though. Mtgox's fee is maximum 0.6% per trade. The commissions I've seen on stock trading sites have been $5 per trade and up. I would guess commodities trading has an even higher minimum fee per trade. – Amin – 2012-04-01T08:23:58.320

Answers

I compared the standard deviation of (USD-denominated) price of bitcoins and the Russell Microcap Index Fund (IWC) which is an ETF (read: basket) of 1359(!) stocks with ca. 300million USD in market cap (each). This is a total apples to (buckets of) oranges comparison, but the results are as follows:

IWC std dev: 3% MtGox BTCUSD std dev: 12%

FWIW, over the last 6 months, the USD-denominated price of bitcoins has been 4 times as volatile as a basket of approx. 1000 stocks with similar market caps.

For a slightly better comparison, the volatility of BTCUSD is about 10x that of EURUSD.

In my opinion, bitcoin is quite stable, especially considering the ubiquitous press of it being so unstable.

Regarding trading fees: Mt Gox's lowest fees are very high (~0.4%) compared to competitive stock brokers, such as Interactive Brokers (~0.1% max). This is similar for commodity futures.

Regarding the speculative nature of bitcoins and market depth: Stocks (esp. "microcap" stocks) are very speculative too, so stocks and bitcoins are similar in this regard. Similarly for any depth of market argument for stocks vs bitcoins, both can be moved by relatively small orders and have only a percentage available for trading on an exchange.

Streblo

Posted 2012-04-01T04:43:23.700

Reputation: 695

2a basket of securities which are not perfectly correlated (such as the IWC) is necessarily going to be less volatile than the individual securities comprising it. So rather than looking for the stdev of the IWC, the more relevant metric would be the average stdev of each individual IWC component. otherwise you're not comparing apples to apples when you compare with bitcoin. do you happen to have access to the individual component data? – nanotube – 2012-07-09T14:48:41.017

I wholly agree and tried to imply that with by saying "apples to (buckets of) oranges." I do have the data, from yahoo.com or google.com, e.g., http://www.google.com/finance/historical?q=NYSEARCA:IWC . You can get a list of microcap stocks (used in IWC, here: http://us.ishares.com/product_info/fund/overview/IWC.htm)

– Streblo – 2012-07-10T21:29:31.833

Great analysis, though on trading fees, while you're correct that those of discount brokers can be lower than MtGox's, these brokerages also place much more arduous conditions on traders, like IB's required deposit of $10K to open an account, and on trades, like IB's minimum fee of $1 per trade (so if you make a trade worth $10 of shares, you'll pay a commission totalling 10% of the value of the trade) which makes their fees in some circumstances much higher.

MtGox lets any one get in, and let's them trade very small amounts at a time without being heavily penalized with higher fees. – Amin – 2012-07-26T08:26:57.897

You wrote: "Price volatility of individual commodities/stocks is inversely correlated with their market cap". There is just a coincidental correlation between the two. Instead, I would say that there will be price volatility when investors are unsure about the value of an asset. You can see this with the value of for example Facebook. It is just very hard to judge the value of their assets, regardless of their huge market capitalization. Similarly, the value of Profit Points (which I invest heavily in at the moment) will heavily depend on the expectation of future profits of Open-org.com. On the other hand, one has government bonds, which have a very stable value, because it is relatively easy to calculate their value and there is usually not large risks involved.

Just to be clear about the value of Bitcoins... If you buy Bitcoins you get a share of the future output of the Bitcoin economy. You can see the master himself (Warren Buffet) explain this here. I believe that it is hard to judge what the future output of the Bitcoin economy will be, but it will be easier and easier the bigger the market capitalization of the Bitcoin economy, so for Bitcoins there will be a correlation between the two, but other factors like risk of government crackdown will also affect the volatility.

David

Posted 2012-04-01T04:43:23.700

Reputation: 3 304

The size of a commodity/stock's market affects the certainty investors have about its future value. A smaller market means faster price changes are more likely since it requires a smaller percentage of the economy to buy or sell the asset to affect its price. – Amin – 2012-04-01T23:18:56.033

Theoretically, not a single trade needs to be made for an asset to increase or decrease in value. Let's for example say that Wal-Mart filed for bankruptcy today. It would not require any trading of their stocks to for them to have lost their value. I think that stability and large size is a general rule, but it is not the reason for a stable price. – David – 2012-04-01T23:58:39.260

You also need to consider the size of the holdings of individuals. If one individual holds a big proportion of the total capital, then they have the power to cause a large drop in the price by flooding the market. Similarly, anyone holding a large amount of cash can cause a spike in the price by purchasing many bitcoins. How much volatility is caused by both these cases depends more on the depth of the market than the total capitalisation.

The key thing to remember is that the current market value only applies to the number of coins available for sale at the current price. There are likely many bitcoin owners who won't sell for anything less than $20 or more, despite the current price of around $5. You couldn't buy all the bitcoins for $102 million, or even $200 million (even if the 21 million coins were actually already available, which they're not).

Highly Irregular

Posted 2012-04-01T04:43:23.700

Reputation: 10 514