Volatility tells investors how quickly the price of an asset is moving from highs to lows, and as such is a useful tool for assessing its level of risk.
Volatility is a term used in finance to describe the speed and size of an asset’s or a market’s price fluctuations. The usual way to calculate the volatility of an asset is by using standard deviations in its annual return over a set period. The extent to which its price changes over time means that volatility represents a reliable indicator of how risky it is to invest in a particular asset.
Traditional Market Volatility
It is so important to evaluate the level of risk in a given market that volatility indexes have been created. You’re most likely to hear about them in connection with traditional stock markets. The VIX in Chicago, USA is one of many. It uses stock prices from the S&P 500 index to build a month-long picture of market volatility.
Volatility is important in other traditional markets too. There’s a volatility index for 10-year US treasury notes that tracks risk and investor confidence in the bond market. There aren’t so many standardized tools to measure volatility in the forex market, but they do exist.
Crypto Market Volatility
In cryptocurrency markets, volatility can be extreme. This is in part because the market is smaller and less regulated than others. Although high levels of volatility often discourage investors, in this case, they have generated huge amounts of public interest in crypto assets. Wild price swings have generated enormous returns in short time periods for some canny investors and this has caught the public imagination.
It’s this kind of wider enthusiasm that will drive the adoption of cryptocurrencies by the mainstream, and this, in turn will gradually reduce the level of volatility in the market due to increased regulation and a greater pool of asset-owning investors stabilizing prices.
The maturing of cryptocurrency markets has spurred investors to take more interest in measuring their volatility, which is why we now have volatility indexes like the Bitcoin Volatility Index (BVOL) now along with several others.