[CHART] Volatility analysis

[cjp]

I made a chart of the volatility of Bitcoin, and how it changes through time:

Apologies for the poor chart quality; I'm more interested in the discussion than in making good-looking charts.

I don't know what is usually used as measure of volatility, but I took the ratio between the highest and the lowest price in a certain time period. I plotted the logarithm of this to make some of the smaller details better visible. I plotted the volatility for 1 day, 7 days and 30 days, based on the daily MtGox USD/BTC price from bitcoincharts.com.

As a general guide to the vertical scale:
1 means: high = 10 * low (so about 900% price change in the given time period)
0.2 means: high = 1.6 * low (so about 60% price change in the given time period)
0.1 means: high = 1.26 * low (so about 25% price change in the given time period)

Question:
For Bitcoin to become useful as a currency, isn't the volatility supposed to become lower, when adoption increases? I think we've seen lots of increase in adoption, but this chart shows little reduction in volatility. Please note that typical volatility levels are REALLY HIGH: we still have a long way to go when it comes to reducing volatility.

What is needed to reduce volatility? Should Bitcoin become "boring" so that we won't have a massive influx of new money in short time spans? Should there be more merchant acceptance? Should there be more "calm, rational" speculators who buy near the bottoms and sell near the tops?

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[oxxymoronn]

I read an article earlier today about this subject.

http://www.washingtonpost.com/blogs/the-switch/wp/2013/12/09/heres-why-volatility-isnt-a-big-problem-for-bitcoin/

Here's an excerpt

It's true that Bitcoin's volatility is a problem right now, but it's a mistake to treat volatility as an intrinsic characteristic of the currency. Bitcoin is volatile for two basic reasons: it's currently difficult to purchase Bitcoins with dollars, and there's a lot of uncertainty about the Bitcoin network's long-term prospects. These are both issues that should get resolved in the coming years, making the cryptocurrency much less volatile.


Liquid markets help to prevent price volatility. When the price of gold or pork bellies or shares of Microsoft stock starts to fall, bargain-hunting buyers jump into the market and push the price back up. That can happen quickly because there are sophisticated institutions like the New York Stock Exchange and the Chicago Mercantile Exchange helping to ensure that buyers who want to get into the market can do so easily.

Regulatory and technical challenges have slowed the development of mature exchanges to perform this function for bitcoins. A thicket of state-based money transmitter laws and the skepticism of conventional U.S. banks has made it challenging to operate a Bitcoin exchange in the United States. As a result, the leading services to trade bitcoins for dollars are all based overseas. They're not well-integrated with the U.S. financial system, so it's slow and expensive for consumers in the United States, Bitcoin's largest market, to buy Bitcoins when they see the price dropping.

[empoweoqwj]

Great chart, you should have a tip jar .....

Markets are driven by fear and greed, that's all markets, not just bitcoin.

But when a market is "selling" something completely new, and virtual in nature, then we are all going to just have to accept the volatility.

I'm not even sure more liquidity will help. Because if people start thinking the "bitcoin experiment" is failing, people will pull their money out, period.

What it needs is time, probably several more years, where people start to trust that bitcoin has "worked" and has become a part of most peoples' everyday lives.

Before that, we will all have the jitters, and the latent fear it could crash to zero.

[cjp]

Great chart, you should have a tip jar .....

Thanks. You can already send tips to the address in my signature:
1KNgGhVJx4yKupWicMenyg6SLoS68nA6S8

Or do you want me to make a specific address for this chart?

[Sindelar1938]

One school of thought is that the price needs to go to 10x current levels for vol to reduce and commerce to become more viable
Read an article about this recently. Seemed to make sense.

[empoweoqwj]

One school of thought is that the price needs to go to 10x current levels for vol to reduce and commerce to become more viable
Read an article about this recently. Seemed to make sense.

Why would a price increase reduce volatility? We've already seen a massive price increase as the charts show and volatility hasn't moved much.