Volatility is a widely used term in both traditional and cryptocurrency markets, so it’s a must to know what it means if you are interested in investing or trading.
What Is Volatility?
Volatility is a measure of how much an asset’s price has changed over time and how quickly it happened. It is one of the primary factors used to effectively assess investment risks.
What You Need To Know About Volatility
Generally, it is considered that the higher the volatility of an asset, the riskier it is to invest in it. Highly volatile assets are also associated with greater potential returns or losses than less volatile ones.
Due to the fact that crypto is a relatively new asset class that has a low level of regulation and is digital in nature, it is categorized as volatile. It means that the cryptocurrency market can be subject to significant upward and downward trends over short periods.
Bonds, in contrast, have lower volatility and usually experience less dramatic value swings that take place over longer timeframes.
Now that we’ve reviewed the volatility definition, let’s take a look at how it’s measured. Typically, traders are primarily interested in finding out historical volatility (HV), which is a figure that derives from analyzing an asset’s price over a certain time period, such as 30 days or a year.
There are two main approaches to measuring HV, namely:
- Using the Beta (β) method – analyze how volatile an asset is compared to the broader market.
- Calculating the standard deviation – analyze how widely the price of an asset has deviated from its historical average.
You may also come across the term “implied volatility”, which refers to the prediction of future volatility of an asset. It’s important to remember that since no one can make exact forecasts, it is only a speculation that can be taken into account when making trading decisions but should not be relied upon fully.
