A statistical measure of dispersion of returns, measured by using the standard deviation or variance between returns from that same security or market index.
What Is Volatility?
Any cryptocurrency that experiences frequent and large upward or downward movement in prices is said to be volatile in nature.
Bitcoin — the first cryptocurrency to be created — is considered extremely volatile.
A good example that illustrates this is the period between the end of 2017 and December 2018 when BTC lost over 80% of its value after hitting an all-time high.
This is higher than the typical levels of volatility seen in other asset classes.
Volatility in most conventional assets is measured by the CBOE Volatility Index, also called VIX. But in the context of BTC, the Bitcoin Volatility Index tracks the volatility of the popular cryptocurrency.
Several factors increase the volatility of cryptocurrencies. These include regulatory news such as announcements by the U.S. Securities and Exchange Commission that can greatly affect the volatility of cryptocurrencies — especially if there are fears that the ability to mine or own Bitcoin may be curtailed.
Cryptocurrency volumes can also be sensitive to geopolitical news. Bitcoin trading, and its price, surged in 2020 — and this was widely linked to COVID-19. The cryptocurrency appeared to act as a financial safe haven, and like gold seemed to be an attractive alternative to cash.
Central banks across the world have pumped billions of dollars into the economies to prevent them from collapsing on the back of COVID-19. On the other hand, Bitcoin’s fixed supply of 21 million draws people to the crypto space.
Crypto enthusiasts have voiced concerns that greater government spending will fuel inflation in the future, and cryptocurrencies can help protect against this risk.
FAQs
Easy. A statistical measure of dispersion of returns, measured by using the standard deviation or variance between returns from that same security or market index.
What is volatility in simple terms? ›
What is volatility? Volatility is an investment term that describes when a market or security experiences periods of unpredictable, and sometimes sharp, price movements. People often think about volatility only when prices fall, however volatility can also refer to sudden price rises too.
What is an example of volatility? ›
In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a volatile market. An asset's volatility is a key factor when pricing options contracts.
What does a high volatility mean? ›
Volatility is the standard deviation of a stock's annualised returns over a given period and shows the range in which its price may increase or decrease. If the price of a stock fluctuates rapidly in a short period, hitting new highs and lows, it is said to have high volatility.
What is volatility behavior? ›
Description: Volatility measures the risk of a security. It is used in option pricing formula to gauge the fluctuations in the returns of the underlying assets. Volatility indicates the pricing behavior of the security and helps estimate the fluctuations that may happen in a short period of time.
What's another word for volatility? ›
volatile (adjective as in explosive, changeable) Strongest matches. capricious elusive erratic fickle resilient ticklish unsettled unstable.
Is volatility good or bad? ›
Investors: Manage Volatility by Planning Ahead
Overall, market volatility is neither good nor bad. It's simply a data point to look at while you devise and execute your trading goals and strategies.
What are the four 4 types of volatility? ›
Typically, traders talk about four different forms of volatility, again depending on what they are doing in the markets. This chapter discusses the four different volatilities: future volatility, historical volatility, forecast volatility, and implied volatility.
What does volatility mean in a relationship? ›
If you and your best friend have a volatile relationship, you frequently fight and make up. Volatile from Latin volatilis, "fleeting, transitory," always gives the sense of sudden, radical change. Think of it as the opposite of stable.
What are the three types of volatility? ›
Volatility can be calculated by using many methods but three types—historical, implied and future-realized volatility—are the most common and generally used in the decision-making process. Volatility is a very important number that goes into the decision-making process of trading options.
Factors Affecting Volatility
Changes in inflation trends, plus industry and sector factors, can also influence the long-term stock market trends and volatility. For example, a major weather event in a key oil-producing area can trigger increased oil prices, which in turn spikes the price of oil-related stocks.
What is a good volatility? ›
As an investor, you should plan on seeing volatility of about 15% from average returns during a given year.
Is high volatility bad? ›
The speed or degree of change in prices is called volatility. The good news is that as volatility increases, the potential to make more money quickly also increases. The bad news is that higher volatility also means higher risk.
Why are people volatile? ›
In many cases, a volatile person may be living with mental illness or other underlying condition that needs to be addressed to help ensure the safety and well-being of the individual and those around them.
What is being emotionally volatile? ›
Emotional volatility is characterized by extreme fluctuations between feeling great and depressed or sad. 1 You may notice that your emotions can change quickly in reaction to some events, such as a disagreement with a friend.
Why is volatility bad in a relationship? ›
Relationships are meant to be healthy additions to your life by contributing to your happiness and possibilities. However, volatile relationships can add to your stress and bring harmful negativity into your life.
What is an example of high volatility? ›
For example, a stock with a beta value of 1.2 has historically moved 120 percent for every 100 percent move in a benchmark index, such as the S&P 500. In other words, it's more volatile than the broader market index.
What are the two types of volatility? ›
Types of Volatility
- Historical Volatility. This measures the fluctuations in the security's prices in the past. ...
- Implied Volatility. This refers to the volatility of the underlying asset, which will return the theoretical value of an option equal to the option's current market price.
For example, changes in import/export regulations or product safety standards can disrupt supply chains and lead to shifts in demand. Technological Advancements: Technological advancements, innovation, and the introduction of new products or services can create demand volatility.
What is an example of volatility in trading? ›
Trading leveraged products in a volatile market
For example, if an unleveraged EUR/USD position moves 1% or an unleveraged stock position moves 1%, the trader makes or loses 1%. However, say that the trader uses a leverage ratio of 10:1 on that position. Now, that 1% move turns into a 10% potential profit or loss.
