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Volatility

Intermediate

In finance, volatility describes how quickly and how much the price of an asset changes. It is usually calculated in terms of standard deviations in the annual return of an asset over a set period of time. Because it is a measure of the rapidity and degree of price changes, volatility is often used as an effective measure of the investment risk associated with an asset.


Volatility in Traditional Markets

Volatility is most frequently discussed in the stock market, and due to its importance in evaluating risk, well-established systems (volatility indexes) exist within traditional markets to measure and potentially anticipate future volatility levels. For instance, the Chicago Board Options Exchange's Volatility Index (VIX) is used within the American stock market. The VIX index uses option prices from the stocks in the S&P 500 index to measure market volatility within a 30-day time window.

Although mostly associated with stocks, volatility is also important in other traditional markets. In 2014, the CBOE rolled out a new volatility index for 10-year US treasury notes that measured investor confidence and risk in the bond market. Although fewer standardized tools exist to measure it, volatility is also a critical component of evaluating opportunities in the foreign exchange market.


Volatility in Cryptocurrency Markets

As in other markets, volatility is an important measure of risk in cryptocurrency markets. Owing to their digital nature, their current low level of regulation, and the smaller market size, cryptocurrencies are far more volatile than most other classes of assets. In part, this higher level of volatility is responsible for powering mass interest in cryptocurrency investment, as it allowed some investors to realize large returns over relatively short periods of time. It is likely that volatility in cryptocurrency markets will decrease over the long term as a result of wider adoption and market growth along with increased regulation.

As cryptocurrency markets have become more mature, investors have taken more interest in measuring their volatility. For this reason, there are now volatility indexes for some of the major cryptocurrencies. Most notable is the Bitcoin Volatility Index (BVOL), but there are similar volatility indexes to track other cryptocurrency markets, including Ethereum and Litecoin.

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