Crypto Volatility: Understanding Price Fluctuations

Volatility is a statistical measure of the dispersion of returns, which is measured using the standard deviation or dispersion between the returns of the same security or market index.

What is volatility?

Any cryptocurrency that experiences frequent and significant price movements up or down is said to be volatile in nature.

Bitcoin is extremely volatile. An example is the period from October 2017 to December 2018, during which BTC hit a record high of $20,089. Its volatility during that period was about 8%. This is higher than typical volatility levels seen in other asset classes.

In most conventional assets, volatility is defined by the CBOE Volatility Index, also called the VIX. In the context of BTC, the bitcoin volatility index tracks the volatility of a popular cryptocurrency. Several factors increase the volatility of cryptocurrencies. Regulatory news, such as SEC announcements, can greatly impact cryptocurrency volatility – especially if there are concerns that the ability to mine or own bitcoin may be restricted. Cryptocurrency volume dynamics can also be sensitive to geopolitical news.

Bitcoin’s trade and price skyrocketed in 2020 – and many attributed this to COVID-19. The cryptocurrency acted as a safe haven asset and, like gold, seemed like an attractive alternative to cash.

Central banks around the world poured billions of dollars into economies to keep them from collapsing amid COVID-19. This also draws people to Bitcoin as it has a fixed supply of 21 million. Crypto-enthusiasts have expressed fears that increased government spending will lead to higher inflation in the future, and cryptocurrencies can help protect against that risk.
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