Congressional Hearing and Volatility

In response to yesterday’s Congressional Hearing on Bitcoin in the House’s Small Business Committee, I wanted to do an analysis on the volatility of Bitcoin. But first, it is important to note the well received comments in the hearing such as Jerry Brito’s comment, “Like the Internet itself, Bitcoin has the potential to be a platform for the kind of permissionless innovation that has driven so much of the growth of our economy.” On behalf of the Bitcoin community, coinbase‘s Director of Business Development and Sales, Adam White, also pointed out the potential for business of all sizes to use bitcoin for “the elimination of fraud, reduction of transaction fees, and monetization of new markets”.

Yet despite much of the hype and excitement there still exist some risks, points out Mark Williams, a risk management expert from Boston University. He refers to the “extreme price risk” of Bitcoin, specifically with its volatility. So I decided to do some of my own research and see how this “extreme” volatility really affects merchants using Bitcoin as a payment processor. 

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I ran an analysis using bitcoincharts historical prices in 5, 15, and 60 minute intervals to calculate volatility. It is within these windows that volatility is relevant to a merchant accepting a payment in Bitcoin (i.e. using the coinbase API). The difference between the 5 and 15 minute volatility is small, both of which are about 0.5% volatility. This means that a $100 Bitcoin payment has a 94% probability of being between $99 and $101 within the first 15 minutes (2 standard deviations from the mean). Considering that there is an equal likelihood that the price rises slightly as opposed to falling slightly means that over time, this should all balance out! So there seems to be insignificant risk for accepting Bitcoin after all.

Another point worth noting is that over time, the volatility of Bitcoin has reduced dramatically. In March 2013, the 1-hour volatility was 2.37% as opposed to the 0.98% in March 2014. This phenomenon is largely due to the fact that Bitcoin is more densely traded. As its acceptance continues to rise, volatility will continue to fall. So for now, we will watch volatility closely but not lose any sleep over it.