How To Trade Bitcoin?: Mt. Gox Bitcoin Price Volatility is up to 50% Greater Than Rival Exchanges

Final week we looked at cost fragmentation across the different exchanges which currently comprise the CoinDesk Bitcoin Value Index: Mt. Gox, Bitstamp, and BTC-e. Analysis confirmed the common perception that considerable, persistent value variations exist across exchanges.

Additionally, the average value on Mt. Gox was shown to be larger than Bitstamp and BTC-e by $ 21 and $ 34 respectively. This phenomenon has been referred to as the ‘Mt. Gox Premium’, which posits that restrictions on US dollar withdrawals have led to bitcoins trading at a larger price tag on Mt. Gox than the other exchanges.

The ‘Mt. Gox Premium’ is escalating

In final week’s article we looked at information from just over a 3-month period, covering late August by way of to early December. Looking at a a lot more recent a single-month window of information, depicted in the chart below, we see a more than doubling of the typical price difference in between Gox and BTC-e of $ 70.

In brief, the Mt. Gox premium has increased drastically in current weeks.

Bitcoin volatility

Value variations are not the only way in which Mt. Gox stands out from other exchanges.

It is effectively known that bitcoin is volatile the cost of a bitcoin is prone to important fluctuations more than short periods of time. But how should bitcoin price tag volatility be expressed?

For securities like stock, volatility is typically expressed by its beta coefficient (or ‘beta’). Beta is a measure of an individual stock’s value volatility against a broader market place measure, which is generally an index like the S&ampP500.

Considering that the S&ampP500 is used as a proxy for the marketplace then the S&ampP500 is assigned a beta worth of 1. As a result, a stock with a beta of 1.2 has 20% greater price volatility than the S&ampP500 index.

Ought to we calculate beta for bitcoin?

To calculate a beta coefficient for bitcoin, a quantity of inputs and assumptions are necessary – such as a risk-free of charge price of return. In today’s Zero Decrease Bound globe, central banks have efficiently set nominal interest prices as quite close to nothing.

Therefore, the risk free price of return is arguably also zero, which presents methodological problems.

There is also the query of which index to measure bitcoin’s volatility against. Need to the Dollar Index (DXY) be employed? Or maybe a basket of alternative assets?

In addition, over what time period ought to we measure bitcoin volatility? Bitcoin has gone via fairly lengthy stretches of flat value functionality.

For instance, the relative price tag lull in between the March-April period and the current October-November run-up, exactly where volatility skyrocketed. Volatility measured in the course of the Could-September period will yield a extremely diverse image than volatility throughout the November-early December timeframe.

In sum, calculating a beta for bitcoin at this point in time would appear to offer you dubious worth.

Some bitcoin exchanges are more volatile than other people

Once again using data from the CoinDesk Bitcoin Price tag Index, we can compare volatility across the three component exchanges (Mt. Gox, Bitstamp, and BTC-e).

1 easy measure of exchange volatility is regular deviation. The normal deviation just expresses the degree of cost movement around the average price over a given period of time.

In short, the greater the standard deviation, the higher the price volatility on the exchange.

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Table 1: Normal deviation of exchange costs, 27th August – 5th October 2013 (Supply: CoinDesk Bitcoin Price tag Index)

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Hunting at minute-by-minute price information for the period from 27th August by way of 5th October (a relatively steady state period when the cost for a bitcoin was comparatively flat) we see that the normal deviation for Bitstamp and BTC-e are roughly inline at $ four.43 and $ four.16, respectively.

Mt. Gox’s standard deviation, however, is a lot higher at $ 6.06. This is close to $ two a lot more (or 50% greater) than the regular deviation of BTC-e.

A volatility mystery at Mt. Gox?

But what explains the significantly higher bitcoin price volatility on Mt. Gox?

One particular of the very first explanatory variables to examine on inquiries of volatility is trading volume. Particularly, decrease relative volume could be one issue behind higher volatility, as deep, liquid markets will typically bring together a lot more buyers and sellers across a greater variety of costs.

Mt. Gox, even though not possessing the same dominant 80% share of bitcoin trading volume that it did earlier in the year, nevertheless reports total volume marketplace share of 20%-30% of all bitcoins traded. I

n other words, if the Gox industry share estimates are right then it would appear unlikely that volume information would explain the greater volatility.

What explains Mt. Gox’s higher volatility? Please share any thoughts you have on why Gox is much more volatile than other exchanges in the comments.

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Mt. Gox Bitcoin Price Volatility is up to 50% Greater Than Rival Exchanges