- Report this article
Lisa JY Tan
Lisa JY Tan
Economics of Token Engineering (Token Economics) | Author
Published Jun 26, 2023
+ Follow
Introduction
What we have been noticing
The world of cryptocurrency or crypto has seen tremendous growth in recent years, with people flocking to invest in the market in the hopes of making a fortune. However, the extreme fluctuations in crypto valuations have resulted in both gainers and losers, regardless of which crypto they invested in. It is not uncommon for two investors to invest in Bitcoin, but have vastly different outcomes due to timing. This is because crypto is often associated with high levels of volatility, prices can fluctuate wildly, with sudden gains or losses occurring within a matter of hours or even minutes. For example,Dogecoin’s value plummeted by 21% in a single day on 3 April 2023.
But why is crypto so volatile? The answer to this question lies in the fact that cryptocurrencies are not backed by any intrinsic value, unlike traditional assets such as gold or diamonds. In this article, we will delve into the concept of volatility in crypto, exploring its causes and effects on the market, as well as strategies to mitigate the risks.
Key topics this article will cover:
What is volatility in crypto and why does it matter?
In traditional finance, volatility refers to the measure of the dispersion of an asset’s price over a period of time. It shows how much a security's market price fluctuates around its average price. Generally, the higher the volatility, the riskier it is to invest in that asset.
Similarly, volatility in digital assets as crypto refers to the degree of fluctuation or rapid and unpredictable changes in the price of cryptocurrencies, such as Bitcoin or Ethereum, over a particular period. However, there is much higher volatility in the overall crypto market than in traditional finance. As a result, major cryptocurrencies like Bitcoin and Ethereum have their own volatility indexes. The most popular is theBitcoin Volatility Index (BVOL)which measures Bitcoin's price fluctuation. Let’s take a look at the example below.
The graph shows the performance of two different markets over time, one with high volatility and one with low volatility. In the high volatile market, the line on the graph appears to be very jagged and unstable, with frequent ups and downs that are often quite significant. This indicates that the market is experiencing a lot of fluctuations and uncertainty, and that investors are likely to see a lot of risk and potential reward. On the other hand, the low volatile market appears much more stable and predictable, with a smoother line that shows little variation over time. This suggests that the market is relatively calm and that investors are likely to encounter less risk and more stability when investing in this market.
Volatility is an important measure of an investment’s risk. In most cases:
Recommended by LinkedIn
Types of volatility in crypto
There are three main types of volatility that are relevant to the crypto market: historical volatility, implied volatility, and realised volatility. Each of these types of volatility measures the degree to which the price of a crypto fluctuates over a given period of time, but they do so in different ways.
Historical volatility looks at how much the price of a crypto has varied in the past, typically over a period of 30, 60, or 90 days, and can help predict how much it might vary in the future. It is calculated by taking the standard deviation of the logarithmic returns of a crypto over the given time period. Historical volatility is a backward-looking measure that can be used to forecast how much a crypto is likely to fluctuate in the future.
Implied volatility is a forward-looking measure of how much the market thinks the price of a crypto will vary in the future. This is calculated based on the prices of options contracts. Options contracts are contracts that give the buyer the right (but not the obligation) to buy or sell crypto at a specified price on or before a specified date. The more expensive the options, the higher the implied volatility.
Realised volatility is a measure of how much a cryptocurrency's price has actually fluctuated over a given period of time. It is calculated by taking the standard deviation of the logarithmic returns of a crypto over the given time period. Realised volatility is a useful measure for evaluating the accuracy of historical volatility forecasts and for assessing the performance of trading strategies that rely on volatility forecasts.
Understanding the different types of volatility in crypto is important for investors and traders who want to manage risk and make informed decisions about buying, selling, or holding cryptocurrencies. By monitoring historical, implied, and realised volatility, investors can gain a better understanding of how the crypto market is likely to behave in the future and adjust their strategies accordingly.
Watch the video below to learn more about volatility and how it affects crypto. Don’t forget to like and subscribe so you don’t miss out on important updates and our newly uploaded videos.
What else did you miss?
Get premium access to unlock more content. If you already have a premium subscription with us,click hereto view the full article.
Economics Design Newsletter
Economics Design Newsletter
3,522 followers
+ Subscribe
Like
Celebrate
Support
Love
Insightful
Funny
28
2 Comments
Jeff R
Edupreneur, Gestalt- driven Team-Builder/ Cancer & Social Action Advocate/ Web3 Educator & Builder #Solana #Rust
1y
- Report this comment
Well done
1Reaction
Hala Faissal, PhD
Head of Economics Department | Assistant Professor | Economist | Educator & Certified Trainer | International Speaker| Fulbright Scholarship Awarded- Temple University, USA.
1y
- Report this comment
It's important to note that while volatility may pose challenges, it is an inherent characteristic of emerging and disruptive markets. As the crypto industry continues to evolve, efforts to address volatility, enhance market stability, and build robust infrastructure will contribute to its long-term viability and broader adoption.Ultimately, understanding and managing volatility is essential for market participants, regulators, and businesses to foster a sustainable and resilient crypto ecosystem.
2Reactions 3Reactions
See more comments
To view or add a comment, sign in
More articles by Lisa JY Tan
-
Case Study: Vesper
Feb 26, 2024
Case Study: Vesper
Vesper Finance is a DeFi platform that allows users to earn interest on their cryptocurrency holdings. The platform…
20
-
Case Study: Boyd
Feb 19, 2024
Case Study: Boyd
Boyd showcases the best in hotels, casinos, restaurants, shows, and more at each of its locations nationwide. The…
10
1 Comment
-
Case Study: Triumph
Feb 12, 2024
Case Study: Triumph
Social play is the heart and soul of Triumph. Team up with your friends, asynchronously and in real time, to take on…
12
-
Unveiling the Secrets of Tokenomics with Pixels.xyz CEO Luke Barwikowski
Feb 5, 2024
Unveiling the Secrets of Tokenomics with Pixels.xyz CEO Luke Barwikowski
Welcome to a riveting journey into the world of blockchain gaming! In our latest podcast, we’ve delved deep into the…
21
-
Ease of Use in Web 3 | Economics With Enzo
Jan 29, 2024
Ease of Use in Web 3 | Economics With Enzo
In the dynamic realm of Web 3.0, where innovation and complexity often collide, one factor stands out as the linchpin…
15
-
Navigating the Future: A Deep Dive into Decentralised Physical Infrastructure Networks (DePin)
Jan 22, 2024
Navigating the Future: A Deep Dive into Decentralised Physical Infrastructure Networks (DePin)
Welcome to another episode of Gio Explains, where we dive deep into the latest industry trends and concepts. In today’s…
24
1 Comment
-
Exploring Blockchain Consensus Mechanisms
Jan 15, 2024
Exploring Blockchain Consensus Mechanisms
Blockchain technology has revolutionized the way we approach decentralized systems, enabling secure, transparent, and…
24
-
The Social Aspect of Blockchain Gaming Economies Ft. Corey Wilton | Mirai Labs
Jan 1, 2024
The Social Aspect of Blockchain Gaming Economies Ft. Corey Wilton | Mirai Labs
Are you ready to dive into the fascinating world of blockchain gaming economies? In a recent episode of the Economics…
19
1 Comment
-
The Citadel Podcast | The Ins and Outs of a Game Economy
Dec 25, 2023
The Citadel Podcast | The Ins and Outs of a Game Economy
Are you a gaming enthusiast intrigued by the intersection of NFTs, gaming, and blockchain technology? If so, you’re in…
12
-
Unveiling the Future: How Real World Assets Will Reshape Our Tomorrow
Dec 18, 2023
Unveiling the Future: How Real World Assets Will Reshape Our Tomorrow
Welcome, savvy investors and blockchain enthusiasts! Today, we embark on a thrilling journey into the heart of a…
19
1 Comment
See all articles
Sign in
Stay updated on your professional world
Sign in
By clicking Continue to join or sign in, you agree to LinkedIn’s User Agreement, Privacy Policy, and Cookie Policy.
New to LinkedIn? Join now
Insights from the community
- Financial Technology What are the best ways to manage cryptocurrency volatility and uncertainty?
- Technical Analysis How can you avoid fakeouts in cryptocurrency trading?
- Blockchain How does the Bitcoin halving affect the network's incentives and dynamics?
- Technical Analysis You're navigating the volatile cryptocurrency market. Which indicators will lead you to reliable decisions?
- Technical Analysis What's the best way to track cryptocurrency trends?
- Technical Analysis What are the most effective ways to use TA data for cryptocurrency trading?
- Technical Analysis How can technical indicators help you identify trading opportunities in the cryptocurrency market?
- Mechanics How can you use technical analysis to inform your cryptocurrency trades?
- Blockchain What are the most important factors to consider when scheduling a DAO token swap?
- Blockchain What are the benefits and challenges of implementing proof of burn in a public blockchain?
Others also viewed
- Rivemont Crypto Fund - Weekly Update – Week #19 Philippe Jetté 6y
- 5 Reasons Why Crypto Is Poised for Growth Bernd Mansson 1y
- Crypto Market Monitor AMINA Bank 7mo
- Decrypting Crypto Volatility Chad Arroyo 6y
- Market's risk appetite declining? Kvarn X 4mo
- How to survive the bear market in crypto? Michael S. 1y
- 2 CRYPTOCURRENCIES EXPECTED TO REACH $50 BILLION IN JULY Boz Tech co 2mo
- Warning: The #Bitcoin Market is Doomed to Collapse, Invest in Physical Silver Instead John Chalekson 3y
- TerraUSD’s stablecoin meltdown holds the crypto market hostage Ciaran Ryan 2y
- Best Coins Under 1 Cent Ivan Andrienko 1y
Explore topics
- Sales
- Marketing
- IT Services
- Business Administration
- HR Management
- Engineering
- Soft Skills
- See All