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  • Writer's pictureTeam Sygnum

Digital Nugget: The crypto market is a white swan

While the crypto market is more volatile than traditional asset classes, the returns have stayed within the expected range – unlike major asset classes, which have experienced market moves that should have occurred with a very small probability only.

Volatility describes the “normal” range of price moves for an asset. Portfolio construction models factor in the volatility of the assets to create the optimal portfolio. When the price of an asset moves more to the downside than it is expected based on its volatility, it can shock portfolios unless complex models are used that factor in extreme events and “non-normal” distributions of returns.

What is the likelihood of extreme market moves?

Volatility defines the size of the expected price moves with approximately two-thirds probability (68.27 percent to be precise). Price moves equating to no more than twice the asset’s volatility (also referred to as “two standard deviations”) should occur with 95.45 percent probability. The likelihood of a market move outside 3 standard deviations is 0.27 percent, for 4 standard deviations this probability falls to 0.006 percent (or approximately 1 in 16,000) and for 5 standard deviations to 0.00006 percent or approximately 1 in 2 million.

When assets experience events that should occur with very low probabilities (e.g. between 4 and 5 standard deviations), these are often referred to as “black swan” events (due to the supposed rarity of black swans relative to white swans).

Comparing the drawdowns in major asset classes relative to their volatility

When we compare equities, bonds, gold, commodities and Bitcoin over the last 7.5 years (since 1 January, 2015), we find that Bitcoin’s drawdowns have stayed within the range expected without “black swan” events while other asset classes have experienced drawdowns that should have occurred with a very small probability.

Fixed income has fared the worst, with the recent drawdowns amounting to between 4 and 5 standard deviations (4.16 to be precise) based on the historic volatility of the fixed income asset class, corresponding to a probability of approximately 0.001 percent. The recent drawdowns in fixed income amount to a black swan event, causing damage to portfolios.

Bitcoin experienced the smallest shocks relative to its normal expected price range, with the worst drawdown at 1.19 standard deviations. Even gold had worse downside shocks than Bitcoin, with the worst drawdown at 1.42 standard deviations. Equities and commodities had maximum drawdowns between 2 and 3 standard deviations.

Comparing moves to the upside

While Bitcoin experienced the least extreme negative events relative to its volatility (i.e. the expected price range) of the five asset classes, it also experienced the most extreme positive market shocks. From trough to peak, Bitcoin had upside shocks at close to 33 standard deviations in any given 1-year window (versus the worst downside shock of 1.19 standard deviations), while the highest upside shock for fixed income was 2.92 standard deviations (versus the worst downside shock of 4.12 standard deviations).


Although crypto assets are more volatile than the major asset classes, they have had the lowest chance historically of shocking portfolios by behaving differently on the downside than the volatility of the asset class would predict. Meanwhile, crypto assets have had the highest chance by a very long way of providing upside shocks to portfolios by delivering annual returns that should have only occurred with a microscopic probability.

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