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September 15, 2021

Thought Leaders

Bitcoin Volatility and Spillover Effects

Investors are now starting to understand the portfolio diversification benefits of cryptoassets, given their potential to produce outsized returns relative to traditional asset classes. However, achieving high returns can often prove to be a bumpy ride for investors. Figure 1 makes this case in point; long periods of upward moves are balanced by significant price drops. In other words, anecdotal evidence seems to suggest a high degree of instability in the price of bitcoin (and cryptoassets more generally).

Figure 1: Bitcoin’s Price Dynamics

Source: Aaro Capital Research, Cryptocompare


Notes: Bitcoin daily prices in USD from July 2014 to June 2020.

Bitcoin has been proved over time to have consistently higher volatility than traditional asset classes. Conventional wisdom and the empirical evidence suggest that this may be due to various factors. A closer look at bitcoin’s holders suggests that one of the leading factors for market instability is the increasing concentration amongst large owners, which are commonly defined as “Whales.” Investors with more than 1,000 BTC in their wallets account for about 42% of the BTC supply, according to Bloomberg . Intuitively, increasing ownership concentration makes prices much more exposed to large buy and sell orders, which make the overall market more susceptible to rapid price swings. Given that only a handful of exchanges are regulated and audited, there is the potential for large investors to manipulate the market. A second factor which is commonly assumed to drive BTC volatility is public perception, i.e. how widespread the discussion is among experts and commentators, and the tone of the discussion from policy making institutions and the media at large. The effect of public perception turns out to be a key element as there is no standard way to value Bitcoin in the first place. The significant asymmetric information between actual market participants and the public at large tends to exacerbate the effect of both good and bad news on BTC and cryptoassets more generally. The relatively high market concentration and significant exposure to public opinion tends to exacerbate the normal interaction of supply and demand in cryptoasset markets. Add to this a relatively underdeveloped market infrastructure and low liquidity compared to more traditional markets such as equities and bonds.


In this respect, there are no significant signs of decreasing volatility. Despite cryptoasset markets enjoying a relatively calm period over the last few months, volatility remains substantial. Figure 2 shows this case in point; the left panel shows daily price changes until June 2020. Even discarding the large drop of March 12th (the so-called Black Thursday), there has still been considerable price variation over the last few months. This is confirmed when looking a pure volatility estimates (right panel) obtained from a standard Generalised Auto-Regressive Conditional Heteroskedasticity (GARCH) model as introduced by Bollerlsev (1986).

Figure 2: Bitcoin Returns and Volatility

Source: Aaro Capital Research, Cryptocompare


Notes: Bitcoin daily returns (left panel) and daily volatility (right panel) calculated from a GARCH model as introduced by Bollerslev (1986). The sample period is from July 2014 to June 2020.

What has often referred to as a “calm” market over the last few months has still generated average volatility of 10% on a daily basis, much higher than traditional financial markets. Figure 3 investigates this by looking at GARCH volatility estimates of other markets vis-à-vis BTC. In particular, we plot the volatility estimates of BTC vs equities (top-left panel), BTC vs corporate bonds (top-right panel), BTC vs commodities (bottom-left panel) and BTC vs real estate (bottom-right panel)

Figure 3: BTC volatility vs other asset classes

Source: Aaro Capital Research

Notes: The sample is from July 2014 to June 2020. Bitcoin (CryptoCompare BTC Spot), Equities (Vanguard Global Stock Index Fund ETF), Bonds (iShares Global Corporate Bond UCITS ETF), Commodities (S&P GSCI Commodity Index ETF), Real Estate (iShares Global REIT ETF). All returns in USD, total returns net of fees.

A few interesting observations emerge. Firstly, the volatility of BTC is an order of magnitude larger than the volatility of traditional asset classes (see left scale of the figures). This still applies over the last few months, a period that has been defined “calm” by most commentators and market participants. This is unsurprising given the highly volatile nature of BTC. Second, there is some correlation in volatility dynamics from March 2020 i.e. during the COVID-19 induced lockdown period. Specifically, there was a common spike in volatilities during the so-called Black Thursday of March 12th, with high volatility in both BTC and global equities. Possibly, this was due to the liquidity squeeze nature of this market event, where all assets except cash typically sell off, even traditional safe havens such as gold. In this respect, liquidity squeezes are distinct from other negative market events. Third, this correlation in volatility dynamics is not only evident for equities, but also for commodity and real estate markets. Again, large volatility across these asset classes tend to correlate towards the end of the sample.

Volatility Spillover

Delving further into the possible correlation between the volatility of BTC and that of traditional asset classes, Figure 4 show a series of scatter plots comparing BTC volatility with equities (top-left panel), corporate bonds (top-right panel), commodities (bottom-left panel) and real estate (bottom-right panel). The regression line (light-grey) shows that there is a positive, albeit very mild, relationship between the volatility of BTC and traditional asset classes.

Figure 4: Correlation between BTC Volatility and Other Asset Classes

Source: Aaro Capital Research

Notes: The sample is from July 2014 to June 2020. Bitcoin (CryptoCompare BTC Spot), Equities (Vanguard Global Stock Index Fund ETF), Bonds (iShares Global Corporate Bond UCITS ETF), Commodities (S&P GSCI Commodity Index ETF), Real Estate (iShares Global REIT ETF). All returns in USD, total returns net of fees.

The positive relationship is confirmed by the regression line (light-grey) which is positively sloped. Interestingly, Figure 4 shows that the positive spillover between volatilities seem to be driven by few outlier observations. By looking at Figure 3, these very large volatility spikes seem to be common during the March 2020 period at the early start of the “great lockdown” due to the spread of COVID-19.

When excluding the period March-April 2020, the often discussed uncorrelation between risk in BTC and traditional asset classes re-emerges. Figure 5 shows the exact GARCH volatility estimates as in Figure 4, but now excluding the period since the start of March 2020. The evidence in favour of absence of correlation is rather striking. There is virtually no relationship between volatility in BTC and traditional asset classes, as confirmed by a flat, in fact slightly negative, regression line.

Figure 5: Correlation between BTC Volatility and Other Asset Classes (without COVID-19 period)

Source: Aaro Capital Research

Notes: The sample is from July 2014 to June 2020. Bitcoin (CryptoCompare BTC Spot), Equities (Vanguard Global Stock Index Fund ETF), Bonds (iShares Global Corporate Bond UCITS ETF), Commodities (S&P GSCI Commodity Index ETF), Real Estate (iShares Global REIT ETF). All returns in USD, total returns net of fees.


The absence of correlation between BTC and traditional asset classes has been the key reason for using cryptoassets in the context of portfolio diversification. Such absence of correlation has been widely documented in the empirical finance research (see, e.g., Bianchi 2020).


What we show in this report is that BTC volatility is not significantly related to the volatility of equity, bond, commodity and real estate markets. There is in fact some positive and mild correlation, but this is only due to the increasing global uncertainty due to COVID-19. When this period is excluded, the correlation among volatility measures in BTC and other traditional asset classes tend to disappear.


The fact that volatility tends to comove for few observations cannot be considered as robust evidence of a coupling between the pricing process of BTC and other financial markets. As a matter of fact, the unusual nature of the COVID-19 crisis makes difficult to determine if indeed Bitcoin shares a common risk dynamic with more traditional markets, or it is merely an artifact due to few outlying observations such as March 12th 2020.


  • Bollerslev, Tim. “Generalized autoregressive conditional heteroskedasticity.” Journal of econometrics 31.3
  • Bianchi, Daniele. “Cryptocurrencies as an asset class? An empirical assessment.” The Journal of Alternative Investments (2020).


The material provided in this article is being provided for general informational purposes. Aaro Capital Limited does not provide, and does not hold itself out as providing, investment advice and the information provided in this article should not be relied upon or form the basis of any investment decision nor for the potential suitability of any particular investment. The figures shown in this article refer to the past or are provided as examples only. Past performance is not reliable indicator of future results.

This article may contain information about cryptoassets. Cryptoassets are at a developmental stage and anyone thinking about investing into these types of assets should be cautious and take appropriate advice in relation to the risks associated with these assets including (without limitation) volatility, total capital loss, and lack of regulation over certain market participants. While the directors of Aaro Capital Limited have used their reasonable endeavours to ensure the accuracy of the information contained in this article, neither Aaro Capital Limited nor its directors give any warranty or guarantee as to the accuracy and completeness of such information.

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