by: ofir beigel | last updated: 2/1/22
Bitcoin is one of the most volatile assets you can invest in today. This post shows the bitcoin volatility index and how to measure it.
Reading: Bitcoin volatility index
bitcoin volatility index summary
the bitcoin volatility index measures how much the price of bitcoin fluctuated on a specific day (relative to its price). the higher the volatility, the riskier the investment, since it is difficult to predict what the price will do.
bitcoin volatility (measured by % change)
last 30 days estimate
1.66181%
last 60 days estimate
1.41586%
That’s the bitcoin volatility index in a nutshell. For a more detailed explanation on bitcoin volatility, read on, here’s what I’ll cover:
- is bitcoin volatile?
- why is bitcoin so volatile?
- how to calculate bitcoin volatility?
- frequently asked questions
- conclusion
1. is bitcoin volatile?
Yes, bitcoin is considered relatively volatile, but it really depends on what you compare it to. bitcoin volatility is a measure of how much the price of bitcoin fluctuates, relative to the average price over a given period of time.
Volatility measures past price performance and is used to predict the probability that the price will change drastically. the higher the volatility, the riskier the asset.
2. why is bitcoin so volatile?
Generally, the smaller the market capitalization of an asset, the more volatile it will be. imagine throwing a stone into a small pond. now take the same rock and throw it into the ocean. the rock will have much more effect in the pond than in the ocean.
Likewise, bitcoin (the small pond for now) is more volatile (ie affected) by daily buy/sell orders (the rock).
Today, the market capitalization of bitcoin is around $350 billion. by comparison, gold’s market capitalization is around $3 trillion (more than 8 times larger).
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market capitalization is calculated by multiplying the number of bitcoins in circulation by the price of each bitcoin.
Since the amount of bitcoins in circulation is limited (21 million) and we already reached 88% of the total amount, the biggest influence on bitcoin’s market capitalization will be through price changes.
once the price rises and drives the market capitalization higher, the price movements will be smaller.
In short, higher price = higher market capitalization = lower volatility.
3. how to calculate the volatility of bitcoin?
Volatility is measured by sampling how far the price of bitcoin moves away from the price at a fixed point in time. in our case, the opening price of bitcoin on a specific day.
the daily bitcoin volatility formula is actually the standard deviation of the bitcoin price.
standard deviation is calculated as follows = √(bitcoin price change).
the variation of the price of bitcoin is calculated as follows:
- sample bitcoin price at different time points throughout the day – number of samples is n
- calculate: (open bitcoin price – price in n)^2
- sum all results = ∑(bitcoin opening price – price in n)^2
- divide results by n = ∑(bitcoin opening price – price in n )^2 /n
- this is the variance of bitcoin
bitcoin daily volatility = bitcoin standard deviation = √(∑(bitcoin opening price – price in n)^2 /n).
For a general calculation of timeframe volatility, use the following formula:
√time period * √bitcoin price variation
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for example, the annualized volatility of bitcoin would be √365 * the daily volatility of bitcoin.
monthly volatility would be √31 * daily bitcoin volatility and so on.
what units is bitcoin’s volatility measured in?
In the example above, we have used the price of bitcoin to measure the standard deviation. therefore, volatility is measured in US dollars. If you want the volatility to be displayed as a percentage, you will need to recalculate the percentage change using the following formula:
- displays the price of bitcoin at different times of the day; number of samples is n
- calculate deviation in percent: ((bitcoin opening price – price in n)/bitcoin opening price *100)^2
- add all results = ∑((bitcoin opening price – price in n)/bitcoin opening price*100)^2
- divide results by n = ∑((bitcoin opening price – price in n)/opening price of bitcoin*100)^2 / n
- this is the change as a percentage
The square root of the percentage variance will be the standard deviation, or volatility, as a percentage.
4. frequently asked questions
what affects the price of bitcoin?
the price of bitcoin is affected by supply and demand. the more demand there is for bitcoin, the more people are willing to pay for it, so the price will go up.
If there is no demand for bitcoin, people will be willing to dump it for a lower price, so the price goes down.
The term “bitcoin price” refers to the latest price of a trade made on a specific exchange. therefore, the bitcoin price on bittamp will be different than the bitcoin price on coinbase, as both exchanges have different operations.
Typically, price differences between exchanges are minimal, however, in some cases a gap can develop, allowing for bitcoin arbitrage opportunities.
5. conclusion
Bitcoin is still considered an extremely volatile asset, meaning price changes of 5% to 10% in a single day are not uncommon.
bitcoin’s high volatility makes it difficult for businesses to accept it as payment and also makes it very nervous for many investors.
On the plus side, the high volatility means that experienced traders can make good profits when trading bitcoin. As bitcoin matures and becomes more common, its price will increase and its volatility will decrease accordingly.
do you think bitcoin will ever stop being volatile? let me know in the comments section below.
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