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.