Why volatility is the key to understanding the crypto market

Volatility is not just a boring financial term. Essentially, it is an indicator of how quickly and sharply an asset’s price changes. In the cryptocurrency industry, this metric becomes especially relevant, as digital assets demonstrate much more significant price fluctuations than traditional financial instruments.

What Lies Behind Volatility Numbers

Volatility is usually measured by the standard deviation of an asset’s annual returns. This indicator allows investors to assess the risk level associated with a particular asset. On traditional stock markets, tools for monitoring this phenomenon have long been developed — for example, the VIX (Chicago Board Options Exchange Volatility Index), which is calculated based on the prices of options on S&P 500 stocks with a 30-day horizon.

Volatility as a Universal Indicator

Although volatility is traditionally associated with the stock market, its significance extends to all asset classes. In the bond market, for example, in 2014, CBOE launched a special volatility index for 10-year U.S. Treasury bonds. In currency markets, volatility also plays a crucial role in risk assessment, although there are significantly fewer standardized measurement tools here.

Cryptocurrencies: Increased Volatility as the Norm

Cryptocurrency markets are fundamentally different from traditional ones. Limited regulation, the digital nature of assets, and the relatively small market size lead to volatility in crypto markets being noticeably higher than in other asset classes. It is this amplitude of fluctuations that attracts speculators and creates opportunities for significant profits in a short period.

Measuring Volatility in the Crypto World

As the crypto market has become more professional, its own tools for tracking volatility have appeared. The Bitcoin volatility index (BVIX) has become a kind of analog to the VIX for the cryptocurrency industry. Similar indices have been developed for other major assets — Ethereum, Litecoin, and others.

The Outlook for Reduced Volatility

The long-term forecast suggests a gradual decrease in cryptocurrency volatility. As adoption increases, the market expands, and regulation tightens, cryptocurrencies will demonstrate more stable price behavior. This will make them more attractive to conservative investors and institutional players, who today avoid crypto precisely because of its volatility. However, at the current stage, this phenomenon remains a defining characteristic of the cryptocurrency markets.