Potential investors wishing to buy Bitcoin should understand that fluctuations correspond to the price and be prepared for any kind of volatility in the future. The novelty of the cryptocurrency and the lack of traceable data should make them wary of crazy fluctuations. When you invest during the low times, prepare for it to fall.
While many investors see bitcoin price fluctuations as part of the game, volatility is difficult for individual investors to manage. There are many reasons for price volatility in mainstream markets, including cryptocurrencies.
Bitcoin price fluctuations and the spot price on cryptocurrency exchanges are influenced by many factors. News developments and speculation are responsible for price fluctuations in both crypto and mainstream markets.
In traditional finance, volatility describes the extent to which an asset price fluctuates over time. Volatility is measured using the traditional market volatility index, known as the CBOE Volatility Index (VIX). Known as the Bitcoin Volatility Index (BVEI), the Bitcoin Volatility Index aims to track the volatility of its market capitalization over different periods of time.
This gives traders a valid argument for not referring to Bitcoin as digital gold, at least for now, because its volatility has not diminished. An investment is considered volatile if its price moves wildly, as in the cryptocurrency market. In 24-day trading, volatility is defined as the spread between the price of an asset and what is indicated as the starting price.
The largest Bitcoin fund, the $2.55 billion Grayscale Bitcoin Trust (GBTC), has traded at a significant premium since its launch in 2013 when bitcoin prices soared and investors were willing to pay its hefty 2% fee because of lack of options. That trend has reversed in recent months as expectations of lower-cost Bitcoin ETFs have increased the volatility of Bitcoin, making Grayscale shares more desirable.
Bitcoin’s annualized volatility hit 11,662% on May 24, its highest level since April 10, 2020, data from wealth manager Blockforce Capital shows. Many investors bought Grayscale shares at a premium – sometimes with borrowed money – and were forced to liquidate when prices fell. Bitcoin prices soared, with the digital currency losing half its value in a matter of weeks.
This particular measure reached its highest value in more than 13 months when Bitcoin made two separate attempts to break over the $30,000 mark, CoinDesk data shows. For example, over a three-month period from October 2017 to January 2018, the volatility of the bitcoin price reached 8%. That is more than double the volatility of Bitcoin during the 30-day period ending January 15th, 2020.
The Pattern in Bitcoin’s Price Volatility
Bitcoin volatility was below 50%, at the lower end of our mean volatility range. Bitcoin’s price hovered in a range of $50,000 to $60,000, the second time that it has fluctuated between the minimum and maximum of that range, with its volatility somewhere in the middle. The volatility of Bitcoin has been below our mid-range for 43 days, after a period of high volatility that ended in March.
In the current environment, Bitcoin volatility has not yet reached the average duration of the volatility cycle, at least not as we define it. It feels as if Bitcoin has been stagnant for a long time and is generally in danger in the long run. The Bitcoin price is currently somewhere in the middle, and volatility is likely to persist.
The extreme volatility that has characterized the emergence of Bitcoins in recent years was evident when the price of a Bitcoin fell earlier this month by as much as 29% after financial regulators banned domestic banks and other financial institutions from supporting the digital currency.
On 18 May, a statement on the website of China’s banking associations said that financial institutions should refrain from providing services with digital currencies due to their volatility. Bitcoin, the most popular cryptocurrency, is not supported by any bank or government and is not recognized as a legal currency. Instead, individuals can only use it for transactions if they agree that it can be bought, traded on an exchange, or by investors.
Bitcoin prices are set by the market, which makes bitcoin pricing complex, as prices can vary between exchanges. For example, if you look up the price of Bitcoin on the Internet, you will find two different prices. They will not be able to trade bitcoin on index sites because they are used to aggregate pricing information.
When trading conditions deteriorate in a particular market, a country’s exchange rate against other currencies is affected. Since Bitcoin is part of a global system, the exchange rate of Bitcoin must be influenced at the same time and on a similar scale, resulting in a strong co-movement between the volatility of Bitcoins and the volatility of other foreign exchange rates.
The volatility of Bitcoin differs from the volatility of major exchange rates not only because it is a reliable currency, but also because the extent of fluctuations is comparable to other major exchange rates.
As the Bitcoin options market has matured, it is now possible to calculate the implicit volatility of Bitcoin in many ways, which is a much better measure.
Volatility increases the cost of hedging, which makes a significant contribution to the price of trading services. As Bitcoin volatility diminishes, the cost of converting Bitcoins will fall.
Extreme volatility occurs when asset prices change dramatically in a short period of time. Share price changes, for example, allow traders to buy low, high, and short stocks when they expect prices to fall. The global interdependence of financial events from one part of the world to the other can contribute to volatility in this area, which contributes to the movement in the VIX.
Most cryptocurrency market observers agree that crypto volatility is in a different league. There is no index to measure crypto price volatility and all you have to do is look at historical price charts to see that exploding peak and depressive lows in crypto-prices occur much faster and more extreme than the prices of assets in the mainstream markets.