Bitcoin is a cryptocurrency, and it is traded like any other tradable asset. However, unlike traditional currencies, bitcoin prices are volatile. This makes it difficult for investors to predict how much money they could potentially make or lose based on what happens to the price of one bitcoin. But now, you don’t have to worry about it anymore. There is a Bitcoin Volatility Index, or BVI.
The BVI measures the volatility of the entire market and attempts to give traders an idea of whether or not the current price of bitcoin is too high or low. A higher number indicates that the price of bitcoin is too low; a lower number suggests that the price is too high.
So far, the BVI has been fairly accurate. In fact, according to data from CoinMarketCap, the average BVI value over the past six months has been 0.976. This compares well to the historical average of 1.056.
Is Bitcoin Volatile?
Bitcoin is often compared to gold because it is digital money that works like cash. Like gold, Bitcoin is scarce, meaning there are limits to how many Bitcoins exist. This makes it extremely volatile. In fact, one Bitcoin could go up or down by hundreds of dollars in just minutes.
The volatility of Bitcoin is measured based on how much Bitcoin’s price changes over a given period of time. For example, if Bitcoin went up 10% in a day, that would mean the price increased by $100 per coin. If it dropped by 10%, that would mean the price decreased by $100 per coin — a drop of 40%.
If we look at Bitcoin’s daily performance since January 2017, we see that Bitcoin’s price has gone up or down by about 20% every single day. So, while Bitcoin is considered very volatile, it really depends on whether you’re comparing it to something else.
The Bitcoin Volatility Index Explained
The Bitcoin Volatility Index (BVX) measures the volatility implied by the market prices of bitcoin futures contracts.
The BVIN is based on the theory that the current market pricing of future volatility reflects the views of those who hold options on the underlying asset. This is different from conventional VIX indices, where the underlying instrument is traded directly.
Bitcoin is unique among digital assets because it does not rely on a central authority such as a government or bank to maintain stability. Instead, it relies on a decentralized network of computers around the world to process transactions and secure the system. Because of this, there is no one entity responsible for maintaining stability; rather, participants must trust each other. As a result, the value of bitcoins fluctuates widely due to factors like supply and demand.
CryptoCompare, the leading crypto data provider, partnered with the University of Sussex Business school to launch the BVIN. In addition to providing insight into the volatility of bitcoin, the index provides a reference point for trading strategies across multiple cryptocurrencies and helps put theory into practice with market volatility.
What is Bitcoin’s Daily Volatility?
The volatility of bitcoin is one of the most important metrics used to measure how much risk there is associated with investing in crypto assets. In simple terms, it measures the amount of fluctuation in prices over a given period of time. While many cryptocurrency investors focus on the overall market cap of cryptocurrencies, what really matters is the volatility of each individual coin.
So, let’s say you want to invest $1,000 into cryptocurrency. If the total value of all coins goes up 10%, then you make a $100 profit. However, if the entire market drops 20% overnight, you lose everything. So, in order to avoid losing money, you must limit your exposure to volatile coins. This is where volatility plays such an important role.
To calculate the volatility of a single asset, we take the square root of the sum of squares of the difference between the current price and the opening price. For example, let’s look at a three-month timeframe. Take the square root of (($0.01 – $0.00)^2 + ($0.02 – $0.01)^2 + ($ 0.03 – $0.02)^2) / 3.
This gives us a figure of about 2.8%. We can do the same thing for different timeframes like 30 days, 60 days, 90 days, etc., and come up with similar figures. These are called standard deviations because they represent the average distance of a particular price from the mean.
A quick note on terminology: Standard Deviation is often confused with Volatility. They are very different things. A standard deviation represents the average change in distribution, while volatility refers to the range of values within the distribution.
Why is the Price of Bitcoin Volatile?
Crypto investors are betting on the future value of cryptocurrencies like Bitcoin. They make guesses about how much it might rise or fall in value. When they’re right, they make money. But when they’re wrong, they lose money. And sometimes they lose a lot of money. In fact, crypto speculators caused a $1 billion crash in one cryptocurrency called Ether, according to Bloomberg News.
The reason why crypto prices fluctuate so wildly is that the market is driven by speculation rather than demand. Investors are making bets that Bitcoin’s price will go up, down, or remain steady. If they guess correctly, they make gains; if they guess incorrectly, they can end up losing big money.
Learn more about market volatility and how to invest in any market through the EndoTech Algorithm Academy.