Thanks for the response. The volatility certainly does seem to be cyclical with a nice peak trough structure, as expected volatility is higher when there are large price increases/decreases. Theory would suggest so, as more people adopt bitcoin and it becomes more widespread in its usage volatility should decrease, at least according to macro economic theory. A futher aim of the research is to compare Bitcoin to another newish FIAT/traditional currency, i imagine if i get this far it will be the most difficult bit to do successfully. The goal is to see if there are any similarities I'm thinking an eastern European country however this may not be ideal as I'd prefer a left wing/liberal country as this would fit in with the ideology or thinking behind Bitcoin. The charts are great which program did you use to produce them? I'm using Gretl at the minute. BTC-e is that from a specific exchange or just a variation of traditional bitcoin. Is the X scale years/months/days?
In terms of auto-correlation you would expect quite a lot but that isn't necessarily a bad thing and logically makes sense; the price this period is dependent upon previous periods. I'm going to go slightly beyond this though. GARCH stands for (Generalised AutorRegressive Condiotnal Heteroskedasticity). The variance of financial series is not constant over time like you said its not bell shaped/normally distributed it is 'fat tailed' there is also quite a lot of volatility clustering in financial markets. This is where high volatility is clustered or pooled. This is what i intend to model if there is a pattern of pooling or if pooling follows certain news announcements this would be helpful when trading the currency.
2.This is a much more difficult question. The way i see things panning out it should be a policy goal but to what extent is the real question. In order for bitcoin to become part of the fabric of society volatility needs to decrease, people will become more computer literate and accepting off a non-physical currency however peoples attitude to volatility is unlikely to change. We as humans like stability and thinking that we know whats round the corner so to speak. By decreasing volatility it then becomes more mainstream more likely that my Mum and Dad would want to use bitcoins, this is a good thing as it will increase the depth of Bitcoins impact into peoples lives as well as the scale. However there seems to be a lot of big money coming bitcoins way in terms of wall street types ( a good example would the Winklevoss twins soon to be launched ETF) i think they would prefer even less volatility in the market, get involved drive up the price of bitcoin more comission etc. (this is a very synical view). I think you are right in hypothesizing that traditional volatility measures wouldn't work, the question becomes what would.
thanks again for responding to the post i'm sure if other realised the potential value of what i am attempting they would also get involved. Apologies for the short essay hope its not too boring.