Understanding Volatility
Volatility is the term used to describe the frequent and significant price fluctuations that certain cryptocurrencies experience. When the price of a cryptocurrency, such as Bitcoin, undergoes large upward or downward movements, it is considered to be highly volatile.
Bitcoin, as the first cryptocurrency ever created, is well-known for its extreme volatility. A notable example of this occurred between October 2017 and December 2018, when the price of BTC reached a record high of $20,089. Throughout this period, the volatility of Bitcoin reached approximately 8%, which is higher than the typical levels seen in other asset classes.
In traditional financial markets, volatility is often measured using the CBOE Volatility Index (VIX). However, for Bitcoin, its volatility is tracked by the Bitcoin Volatility Index.
There are several factors that contribute to the volatility of cryptocurrencies. Regulatory news, such as announcements from regulatory bodies like the U.S. Securities and Exchange Commission, can have a significant impact on cryptocurrency volatility. If there are concerns that the mining or ownership of Bitcoin may be restricted, it can lead to increased volatility.
Geopolitical news can also influence the trading volumes of cryptocurrencies and, consequently, their volatility. For example, in 2020, Bitcoin trading and its price surged, largely due to the COVID-19 pandemic. Bitcoin appeared to act as a safe haven asset, similar to gold, and became an attractive alternative to cash.
Due to the extensive economic stimulus measures implemented by central banks worldwide to combat the effects of COVID-19, people have turned to Bitcoin as it has a limited supply of 21 million coins. Some cryptocurrency enthusiasts believe that increased government spending will lead to future inflation, and cryptocurrencies can serve as a hedge against this risk.
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