Bitcoin Experiences Increased Price Swings Despite Lower Volatility

Bitcoin is undergoing more significant price fluctuations this year than it did during the 2018 bear market, even as its overall volatility has decreased dramatically. This situation presents challenges for those relying on standard risk assessment models.

According to an analysis by CoinDesk, the leading cryptocurrency has recorded ten occasions in 2026 where its price moved at least three standard deviations from its typical trading pattern. This figure surpasses the eight such instances documented throughout 2018, a year when Bitcoin's value plummeted by 73%.

These notable price movements are measured in ‘sigma,’ which indicates how much an asset's price typically diverges from its normal behavior. CoinDesk assessed daily price changes against Bitcoin's 30-day realized volatility, which reflects its average daily price movement over the month. Any day with a price change of at least three times the typical movement is classified as a ‘3-sigma’ day.

In a typical bell curve distribution, about 95% of movements fall within 2-sigma and 99.7% within 3-sigma, making a 3-sigma movement quite rare. A high frequency of such days suggests that Bitcoin remains susceptible to sudden price changes, even as its overall volatility appears to be subsiding.

While Bitcoin's annualized volatility has dropped to approximately 46% this year from 84% in 2018, the average size of its 3-sigma movements has also decreased, averaging around 7%, down from about 10% eight years ago. Nicolas Quatravaux, head of EMEA at Paradigm, noted that although the market has matured with increased institutional participation and liquidity, the potential for sharp price corrections remains. "Bitcoin still experiences long periods of calm followed by sharp price adjustments, and that dynamic hasn't changed," he stated.

In comparison with other volatile assets, Bitcoin's volatility has been similar to that of Nvidia since 2024, at about 47%. However, Bitcoin has recorded 26 three-sigma days, while Nvidia had only eight. The S&P 500 had 16, and gold had 12 during the same period.

Implications of Declining Volatility on Risk Models

The occurrence of extreme price movements poses a significant challenge for investors who utilize volatility-based risk models to determine their Bitcoin holdings. One commonly employed metric is value-at-risk (VaR), which estimates potential losses in a portfolio during adverse market conditions. Some VaR models heavily rely on recent price movements, which can lead to a misrepresentation of an asset's risk profile during extended periods of low volatility.

This decline in Bitcoin's 30-, 90-, and 180-day volatility metrics may prompt investors to increase their exposure, potentially overlooking the risk of significant losses. VaR models estimate loss thresholds but do not account for the severity of losses beyond those thresholds, a concept known as tail risk. Bitcoin's recurring 3-sigma movements highlight the necessity for investors to take extreme outcomes into consideration, even in times of reduced daily volatility.

Luuk Strijers, CEO of the crypto options exchange Deribit, stated, "Standard VaR measures do not adequately address the full tail risk, which has prompted the industry to shift towards measures like Expected Shortfall that do consider tail risk." Expected Shortfall evaluates the extent of losses on the worst days, providing a more comprehensive view of potential damage from extreme losses than VaR alone.

"If tail risk is ignored in portfolio strategies, a quieter Bitcoin environment can lead to broader allocations, making sudden price spikes have a greater impact on the portfolio," Strijers added, mentioning that these 3-sigma risks can be hedged using Bitcoin options.

Drivers of Continued Price Volatility

Market experts attribute the persistent volatility to a combination of unpredictable macroeconomic events and highly leveraged options trading. Quatravaux noted that this year serves as a prime example of these dynamics at play. "It began slowly, with funds shifting to tech stocks and a series of DeFi hacks prompting a focus on volatility selling and structured products for yield. Then events like Trump’s statements, the Iran conflict, and Fed announcements led to outsized trading days," he explained.

Traders often build risk when they bet on relative price stability, which involves selling options as a form of insurance against significant price fluctuations. This strategy can be profitable during stable market conditions; however, when unexpected macro news strikes, these traders may find themselves on the wrong side of the market, exacerbating price movements as they scramble to cover their positions.

Alexander S. Blume, co-founder and CEO of Two Prime, highlighted a specific trade strategy known as call overwriting, where investors sell call options on Bitcoin they already own, sacrificing some upside potential for consistent income. He remarked, "Despite the overall decrease in volatility, the substantial growth in derivatives market positioning allows for frequent large price movements. Currently, call overwriting is a very crowded trade, and any upward movement can trigger a short squeeze, amplifying price changes."

A More Robust Market Landscape?

On a positive note, the market seems to be managing these price shocks more effectively than in the past. On September 21, during Bitcoin's latest 3-sigma jump, Paradigm facilitated a record $6.7 billion in options trades. Quatravaux noted, "This time, we haven't observed any trading desks suffering significant losses." He remarked on the improved sophistication of market participants, enhanced risk management, and increased institutional investment, stating that "a challenging month remains just that — a tough month."

However, Quatravaux cautioned that these sudden price swings are unlikely to disappear. "Data from the past decade indicates that these extreme days persist, even as the market matures, largely because macroeconomic shocks are ever-present," he concluded.