Bitcoin Volatility Index

Bitcoin has a reputation for being a highly speculative asset. Although the digital currency is highly volatile, it has shown exceptional signs of stability of late. In fact, in early October, Bitcoin volatility hit a 17-month low. Despite the unprecedented COVID-19, the cryptocurrency traded in a tight range. Some experts saw this as a sign of the cryptocurrency maturing.

The Bitcoin volatility index, in particular, tracks the volatility of the world's leading digital currency by market cap over different periods. Bitcoin's value has been historically quite volatile, reaching nearly 8% from October of 2017 to January of 2018. To put that into perspective, that's more than twice the volatility in the 30-day period ending January 15, 2020. But why does Bitcoin have a volatile value?

Geopolitical events and statements by governments that regulate Bitcoin can affect the decisions of Bitcoin users. Bitcoin's early users included several bad actors. This created news headlines, which sparked fear in investors. In October 2013, Bitcoin featured in high-profile drug transactions. This news story shocked investors, forcing some of them to opt for more trusted currencies at the time.

Public panic can drive the value of bitcoins versus fiat currencies down rapidly. However, bitcoin-friendly investors can also push the Bitcoin value versus the dollar back up in a short period preceding the bad news. That's why although Bitcoin has gone through media scares that could be detrimental to a cryptocurrency, its value has steadily increased over the years.

Several other issues affect Bitcoin's volatility index. These include the swaying of Bitcoin's perceived value, the uncertainty of Bitcoin's future value, risks associated with holding a large amount of currency, high profile losses, and tax treatment. Bitcoin also faced a lot of security breaches in the early years after its inception. This, of course, was worrying to a lot of potential investors.

What is the Bitcoin Volatility Index? 

Volatility is a measure of how much the price of a financial asset changes over a period of time. For instance, this site tracks the volatility of the Bitcoin price in US dollars. Bitcoin remains one of the more volatile assets you can invest in today. The Bitcoin volatility index measures how much Bitcoin's price varied on a specific day, relative to its price. It is found by sampling how far away Bitcoin's price goes from the price at a fixed point in time. Therefore, the higher the volatility, the riskier the investment, and vice versa.  

Why is volatility important? 

Volatility means that an asset is risky to hold at a particular point in time. That means that its value may go up or down substantially. The more volatile a financial asset is, the less willing people will be to invest in it. They will not hold on to it. Instead, they limit their exposure through hedging because volatility increases the cost of hedging. Therefore, understanding volatility allows investors to make more informed investment decisions. 

How volatile is Bitcoin relative to other currencies?

The volatility of gold is around 1.2% on average. For comparison, other major currencies average between 0.5% and 1.0%. Because Bitcoin is an extremely volatile asset, a volatility average of 5%-10% on a single day isn't uncommon. Unfortunately, its high volatility makes it difficult for businesses to accept it as payment. Consequently, it still makes a lot of investors uncomfortable. 

On the bright side, experienced traders relish the high volatility because they can make a nice profit from trading Bitcoin. Furthermore, over the years, Bitcoin will become a more mature cryptocurrency. As it becomes more mainstream, its price will rise, and its volatility will decrease, making it a more appealing asset for investors.