Volatality in crypto isn't always bad. The myths around volatality for Bitcoin. Understanding Volatility in Cryptocurrency

Why is Crypto So Volatile At Times? Explained.

By Coins Reporter | Coinsreporter | 17 Mar 2024

Many people, especially the newbies, complain about the high volatility of crypto. It's not that their complaint is unnecessary or unwanted, but before deciding to enter in the loop they already knew about high volatility of crypto assets. Additionally, I feel for the lack of clarity about the topic of crypto's high volatility is immense.

At times a coin may rise higher than anticipated or it may crash like there's an earthquake. There are a few questions which I think always bury down your mind when this happens? So, why not jump down the rabbit hole of volatility and try to understand it from the perspective of crypto assets.

What is Volatility?

It is a rate at which the price of a coin increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease.

Formula $\sigma_T = \sigma \sqrt{T}$ $\sigma_T$ = volatility over a time horizon $\sigma$ = standard deviation of returns = number of periods in a time horizon

Description: Volatility measures the risk of an asset. Volatility indicates the pricing behavior of a coin and helps estimate the fluctuations that may happen in a short period of time.

If the prices of a coin fluctuate rapidly in a short time span, it has high volatility. If the prices of a coin fluctuate slowly in a longer time span, it is termed to have low volatility.

Key Components of Volatility

From the definition above, we may understand that Time and returns are two components of volatility. If returns are considerably higher or lower over a short period of time, this defines a highly volatile asset. If returns are considerably steady over longer periods of time, this is low volatility.

So, it's understandable now that volatility is the major component of any type of investment, be it investing in Dollars or Gold.

Why is there Volatility?

After this descriptive definition and a bit of more understanding about components, it should be much easier to understand as to why Volatality happens?

The first and foremost the rule of demand and supply.
Money flows in the economy
Macroeconomic conditions
Human Factors
Key Events

These five are the best reasons for a price to fluctuate over a time. Talking about crypto, you may have already listened that 'Crypto is a highly volatile asset'. But I would rather correct it and say 'Crypto is a highly volatile asset at times'. There are times, recently, when crypto has been less volatile over periods of time. So, we need to correct this myth and be more open in our stance for crypto volatality.

Additionally crypto is a new and emerging sector with a huge potential. This potential leads to high demands or sometimes taking high gains out of market. This has happened to every emerging market. The best of these example is from recent surge in AI related stocks. The prices of these stocks have seen major growth and major decline in short periods of time. For example take a look at NVDA graph for 5 days.

Is Volatility Bad For Crypto?

So, is it a big deal that crypto is often titled 'a highly volatile asset? Yes, it is. One because it's volatality isn't always high. Second high volatality is not always bad. High volatility comes with a perk of high profit. It's highly risky, but we all know when risk is bigger the profits are also bigger. Try to understand it from the image.

There's also one more aspect of crypto that leads to higher Volatility. It's the ability to trade crypto anywhere and anytime. It's a 24×7 market. Sometimes while you may be sleeping, the opposite part of the world may be buying or selling with full force. This is unique to crypto and it's not bad at all.

Conclusion

At last , I must say that volatility is a subject that most people relate with negative impressions. However for those who want to make an absolute profit with any investment, reliance on volatility is the key. The best traders use the implied volatility and get the best outcome.

Oh! I am sorry, I didn't mention anything about implied volatility. In case you want know what's the best time to buy and sell an asset, implied volatility matters the most. You can learn about it here.

If you want to follow the topic and earn sats by participating in discussions, you can join me on Stackernews.com, a platform much similar to Publish0x.

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Coins Reporter

Once a Bitcoiner and forever will be. Love to share my views even if they are unbelievable.

Coinsreporter

Let's talk about how cryptocurrency is revolutionising the financial sector. How it's changing your life and my life. The general idea of this blog is to write content that is relevant, up-to-date, useful and interesting.