Cryptocurrencies have become the buzzing word in the present era. Every investor is looking forward to cryptos despite its high risk. If you’re in the investing or trading industry, you perhaps came across the term’ volatility.’
But what exactly does volatility mean? This is what you’ll uncover in this article.
Whether you’re an enthusiast or an established investor, you’ve come to the right place to understand the volatility in cryptocurrencies. Moreover, if you want to know more about the latest prices of cryptos or have no idea how to get started, head over to OKX right now.
So, let’s dive in without any further delay.
What Is Volatility In Cryptocurrencies?
Let’s understand the meaning of volatility in the simplest terms. It’s a finance term used to measure the price movements of an asset or traded elements over time. Similarly, measuring the price movements of cryptocurrencies such as Ethereum, Bitcoin, etc., in a certain period is known as volatility.
Here’s an example of Bitcoin volatility.
The Bitcoin price in the morning around 9 am today was $17000. And by the evening, around 5:30 pm, the Bitcoin’s price had dropped to $13000.
In the earlier example, the price changes are huge. Hence, it’s often referred to as high volatility. The more the volatility, the higher the risk– It either gives you huge returns or unbearable losses.
Not only Bitcoin but all cryptocurrencies are also highly volatile. This means you’ll notice quick changes in prices in a short span. That’s why trading cryptocurrencies without adequate knowledge is tricky.
On the other hand, stocks have various volatility ranges. Large-cap stocks like Apple, Berkshire Hathaway, or Amazon are more stable than the turbulent penny stocks. Meanwhile, bonds are another set of assets most people own. Anyways, these are often referred to as less-volatility assets.
Is Volatility Bad?
In the present era, the term volatility has a negative effect. Over the last few decades, people experienced severe market crashes. Investors learned colossal lessons from the market’s erratic price movements.
Although the high volatility in cryptocurrencies makes it a riskier investment, investors love to take risks. They believe not taking risks is the foremost step to failure. Yet, the traditional investors embrace slow and steady returns.
Since cryptocurrencies have become more popular over a couple of decades, the debate around volatility has become even more complicated. So, one cannot say volatility is terrible as it becomes the hope for a few investors. In contrast, volatility is an enemy for investors who love consistent returns.
How Do You Measure Volatility?
Investors often measure volatility to predict future price movements. The investors can derive the future prediction from previous price movements of 30, 60, 90, 120 days, or even more. The prediction of future price movements is known as “implied volatility.”
Experts use multiple tools to predict the volatility of the crypto. One of the popular tools includes the Cboe Volatility Index(Aka fear index). Beta is also the best method to measure the volatility of a stock in the broad market.
Another way to analyze and predict volatility is by computing the standard deviation of the asset. The standard deviation lets you know the asset’s price movements from historical data.
Let’s Understand The Healthy Market Volatility
Every market is volatile. Whether it’s stocks or cryptos, everything has its volatility range. So, what’s the healthy market volatility? This is what you understand in this section–The healthy market volatility.
High volatility is linked to market chaos, losses, and more significant risks. Since the markets swing between highs and lows, there exists uncertainty that turns the whole market upside down.
Extreme volatility is rare. The regular stocks you notice in the current market have healthy volatility. This means the extreme highs and lows in the market occur once in a blue moon. The healthy market volatility is predictable as they occur based on the company or industry news updates. The investors buy or sell assets based on their market evaluations.
According to the Volatility Index(Aka fear gauge) at the Cboe Options Exchange, the healthy volatility value lies between 12 and 20. If the market’s volatility exceeds 20, it’s known as extreme volatility. For instance, in August 1990, the fear gauge was valued at 36.47, and in 1991 March, it was restored to 16.49. But why does extreme volatility exist?
Experts stated the three reasons as follows.
• Rapid trade-in and trade-out of speculators
• The rapid growth of institutional investors
• Derivatives markets trends that indirectly influence the market
Even the same applies to cryptocurrencies, too(We shall discuss them in the later section).
Then, What About The Volatility Of Cryptocurrencies?
Although there aren’t any standard methods or tools to measure cryptocurrencies volatility, experts analyze and predict using historical price charts.
Let’s take the example of Bitcoin. Bitcoin’s price increased by 125% in 2016. Surprisingly, the price increased by over 2000% in 2017. After that, its value has decreased. In 2021, it broke the records and set a new record– It tripled the peak price in 2017 and attracted hundreds and thousands of investors investing in Bitcoins.
As discussed earlier, the news developments, speculations, and other indirect market influencers affect the volatility of the crypto. There are even several factors affecting the volatility of the crypto. These include the following.
• A poor ecosystem of firms and institutional investors
• Lack of liquidity
• Developing technology
• Media/News updates
• Crypto investor profile
All these factors directly or indirectly affect the cryptocurrency’s volatility.
Let’s Sum It Up
Cryptocurrency is an emerging market and is prone to extreme highs and lows in a short period. And this erratic fluctuation in price movement is known as volatility. In general markets such as the stock market or real estate, the volatility can be measured effortlessly.
However, when it comes to cryptocurrencies, predicting volatility is pretty tricky. Usually, experts analyze the crypto’s volatility or future trends based on its historical performance.
The extreme volatility either gives you great returns or dumps you in the ocean of losses. This is why investors think volatility is an enemy. But this doesn’t mean it’s bad as it ensures hope to a few investors.
What do you think?