First off, what is the Bitcoin Volatility Index?
The Bitcoin Volatility Index is an up-to-date look at how volatile Bitcoin is using its price in U.S. dollars. It includes volatility information for Bitcoin dating back to the cryptocurrency’s inception.
How does volatility work?
Volatility is simply a measurement of the amount of variance in a financial asset’s price. A financial asset
that only has miniscule shifts in price has low volatility whereas a financial asset with huge swings in price has high volatility.
Here are two examples to demonstrate:
Let’s say you have $1,000 in your bank account. The value of a dollar isn’t set in stone. Like all currencies, its value fluctuates. But the odds of it suddenly being worth significantly more or less is almost nil.
The United States would essentially need to collapse completely, and that probably won’t happen, regardless of what people say about the current political climate.
Bitcoin is on the other end of the spectrum. If you had 1 bitcoin from April of 2017 to the end of April of 2018, you would have seen it increase in value from about $1,340 all the way up to almost $20,000, drop to below $7,000, and then bounce back to over $9,000.
It’s those wild swings and the profit potential that has people flocking to the Bitcoin exchanges.
What prices does the Bitcoin Volatility Index use?
CoinDesk is the source for the Bitcoin prices that this index uses.
What is the definition of volatility for this index?
The Bitcoin Volatility Index takes the standard deviation of daily returns on Bitcoin for two time periods – the past 30 and 60 days.
This means that the index currently measures historical volatility, which is the only option available right now because of how new Bitcoin options trading is.
Once that market develops more, there will also be an index with the implied volatility of Bitcoin.
Why is it necessary to understand volatility?
The volatility of a financial asset gives you a good idea of how much risk you’re taking when you hold it. Most investors either stay away from volatile assets or hedge to limit their risk.
Since hedging is most common with volatile assets, higher volatility also means that hedging costs more. When assets become less volatile, it’s not only cheaper to hedge, but conversion costs go down, too.
While conservative investors typically avoid volatile financial assets, speculators often choose volatile assets because of the greater profit potential.
The volatility of Bitcoin, combined with its upsurge in popularity, has led to considerable debate over whether it’s a prudent choice for a long-term investment.
How does the volatility of Bitcoin compare to that of precious metals and other currencies?
Bitcoin started 2018 at a volatility of 7.71 percent, but it started dropping in March and held at just under 5 percent for April.
That’s still significantly higher than the volatility of precious metals and major currencies. Gold generally has a volatility of about 1.2 percent, and the average for the major currencies ranges from 0.5 to 1 percent.
On the Bitcoin Volatility Index, you can choose what you want to compare. For example, you could compare the volatility of the dollar to that of the Euro, or compare gold to the dollar.
Some of the series have an asterisk next to them, and this means that they aren’t directly comparable to series without asterisks. This is because the markets for fiat currencies aren’t open on weekends or holidays, and certain price changes will actually be changes that occurred over multiple days.
Those changes over multiple days aren’t used for volatility analysis, meaning the measurements of volatility over the previous 30 and 60 days don’t have 30 or 60 data points.
Consider the series without asterisks to be official and the series with asterisks still useful, but more for entertainment purposes.