What Is Volatility?
Volatility refers to the degree of fluctuation or variability in the price of a cryptocurrency.
When a cryptocurrency experiences frequent and significant price movements, upwards and downwards, it is considered volatile.
Volatility Explanation | Source: Investopedia
Unveiling Dynamics and Influences
Compared to traditional asset classes, cryptocurrencies tend to exhibit higher levels of volatility.
While volatility in conventional assets is often measured using the CBOE Volatility Index (VIX), the Bitcoin Volatility Index tracks the volatility specifically for Bitcoin.
Several factors contribute to the volatility of cryptocurrencies.
Regulatory news, such as announcements by regulatory bodies like the U.S. Securities and Exchange Commission, can significantly impact cryptocurrency volatility.
Market Sentiment and Economic Factors
Geopolitical news can also affect cryptocurrency volumes and prices. In 2020, Bitcoin trading and its price surged, which was attributed to the impact of the COVID-19 pandemic.
Bitcoin was seen as a potential haven asset and an alternative to traditional currencies during this time.
Furthermore, concerns about inflation and government spending have driven some crypto enthusiasts to view cryptocurrencies as a hedge against inflationary risks.
The limited supply of cryptocurrencies like Bitcoin, with a fixed maximum of 21 million coins, attracts individuals seeking protection against potential future inflation.
Overall, volatility in the cryptocurrency market can be influenced by a range of factors, including regulatory developments, geopolitical events, and economic trends, making it an essential consideration for investors and traders in the crypto space.