Oil Is Now More Volatile Than Bitcoin - Understanding the Rising Volatility

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Wednesday, February 26,  2020 /01:55 PM / By Alex Kimani of Oilprice.com / Header Image Credit: CryptoCrunch

 

You know that the oil markets have truly gone to the dogs when they are suddenly riskier than one of the world's most volatile commodities: bitcoin. 

Bitcoin and most cryptocurrencies are synonymous with extreme bouts of volatility. However, it's crude oil that is now earning that dubious distinction after exhibiting price swings wilder than even the leading cryptocurrency. 

On February 10, West Texas Intermediate (WTI) oil's one-month realized, or historical, price volatility stood at 105.3%. In contrast, bitcoin's historical volatility clocked in at 42.3%, its lowest reading since September, according to Skew Markets. 

Historical volatility is a measure of how much commodity prices have varied in the past calculated as the standard deviation of daily price movements of the front month futures price, typically for a 30-day period. The metric is expressed as a percentage in annualized terms. 

Rising Volatility 

A commodity's historical volatility, however, does not tell us anything about the direction of the price movement; rather, it tells us the degree to which a security's price movement is deviating from the average. 

It would, therefore, not be a stretch to say that crude oil's volatility has lately exceeded that of bitcoin. 

During the period under review, WTI's historical volatility shot up from 38.7% to 119.6% by late January while S&P 500 Index's realized volatility increased to 15.6% during the last week of January. 

In contrast, BTC's volatility retreated from 66% to 42%--hardly surprising given that BTC tends to benefit from flight to safety trades. 

That said, don't rush to dump your gold holdings to buy some BTC just yet. 

Despite its falling volatility, bitcoin remains considerably more volatile than gold, one of the commodities that has traditionally been regarded as leading safe haven assets. 

Gold's historical volatility doubled during the early part of January to 18% before sliding back to 10% during early February. In other words, gold at its most volatile has still been considerably less so than bitcoin, which proves the most popular crypto still has some way to go before claiming the safe haven mantle from the yellow metal. 

Indeed, bitcoin has failed to play that role to a satisfactory degree during the latest market selloff. BTC was down nearly 5% on Monday's stock market rout on a day the S&P 500 fell 3.5%, the biggest one-day loss by the broad-market index since August 2019. That drop was not an aberration for BTC, either, which has suffered intraday declines of more than 3% seven times so far in the first two months of the year alone. 

For perspective, gold bullion was down 1.5% to about $1,650/oz though still 5.1% up over the past 30 days. 

Coronavirus Mayhem 

And you might have guessed right by now: the coronavirus mayhem is largely to blame for crude oil's sharp spike in volatility. 

The viral outbreak has thrown a monkey wrench into financial markets across the globe, with the crude oil market frequently finding itself whipsawed by the turn of events. 

The January rally that saw oil WTI prices shoot up nearly 10% in a matter of days was triggered after Washington launched a retaliatory attack on an Iranian military base in Iraq, killing a top military commander and injecting considerable geopolitical uncertainty into the markets. Unfortunately, the rally was only to be short-lived, cut off by the first news of the coronavirus outbreak in China. 

The oil market is officially now in bear territory after posting the worst day in more than a month on Monday on heightened coronavirus fears. 

U.S. WTI crude dipped more than 5% at the session low to settle at $50.45 with investors worried that a subsequent slowdown in the global economy could further dent the already weakened demand for crude. 

Prices, however, managed to slightly recover from the lows to settle at $51.43 per barrel--still bad enough for its worst day since Jan. 8--after Saudi Aramco CEO Amin Nasser reportedly said that the coronavirus impact will be "short term". Nasser said that Aramco has not evacuated its staff from China. 

Right now, there's plenty of uncertainty in the oil markets with very little clarity regarding if and when the outbreak will be brought under full control. 

While the Aramco chiefs expect the situation to have normalized during the second part of the year, others contend that the situation remains tenuous and the outbreak could rebound when Chinese residents return to work and school. 

Monday's heavy selloff suggests that the bears are the ones holding sway right now, while trading in oil has suddenly become a (fabulous, for some) game of volatility that makes it as exciting as crypto.]

Proshare Nigeria Pvt. Ltd.

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