Volatility, as used in finance, is the rate at which an asset’s price changes for a given set of returns. Put more simply, it is a measurement of the rate and magnitude of price movements in any market, whether it is for a specific group of shares, the stock market as a whole, or cryptocurrencies.

Typically, statistical measures that examine past price fluctuations are used to calculate volatility. The ‘standard deviation’, which expresses the degree to which a set of numbers (in this case, prices) diverges from its average, is the most often used indicator of market volatility. When an asset’s price fluctuates dramatically up and down in a short amount of time, it is said to be volatile. Elevated volatility signifies an increased level of risk along with the possibility of greater return. It resembles a roller coaster ride, with exhilarating ascents and precipitous descents. Low volatility, on the other hand, is more like a leisurely boat ride—slow, steady, and less unpredictable.

Knowing volatility gives you a sense of the risk and uncertainty attached to a certain asset. It may have an impact on when you make investments, how much you could make back, and how you approach investing overall.

High volatility frequently denotes a great deal of ambiguity surrounding an asset’s value, which may be a symptom of increased risk. Investors that assume this additional risk could ask for a higher return. On the other hand, an asset with reduced volatility is typically regarded as less hazardous, which could lead to lower possible returns.

Volatility can be brought on by a number of things, such as company news, natural disasters, geopolitical unrest, and economic developments. Important news might spur quick asset purchases or sales, which can change prices and raise volatility.

Many times, people list cryptocurrencies as some of the most volatile assets. Examples of these include Bitcoin, Ethereum, and many more. They have in fact gained notoriety for their notoriously large and abrupt price fluctuations. A typical day may see a 10–20% daily increase or decrease in the value of a cryptocurrency—a type of price volatility that is uncommon with traditional currencies or other assets.

Cryptocurrencies are typically more volatile than conventional fiat currencies for a few reasons. This implies that a cryptocurrency’s price may fluctuate significantly over short periods of time, allowing investors to potentially see large gains or losses.

Some Key factors which make up cryptocurrencies volatility include:

• industry maturity: One important factor is that, in comparison to other financial markets, the crypto industry is still in its infancy. Because there are many players in traditional markets like stocks and currencies, they are more stable. The cryptocurrency market, on the other hand, is more volatile due to its smaller size and lack of participation.
• Lack of liquidity: There may not be enough buyers or sellers of cryptocurrencies at any particular time, especially those that are less well-known. Small trades can generate price movements when liquidity is minimal. A single trade has a far greater impact and can cause sharp price swings.
• speculative nature: The prices of cryptocurrencies are greatly influenced by the feelings and speculative actions of investors. Panic selling can lead prices to plummet quickly, while FOMO (fear of missing out) can cause them to rise swiftly. Significant price fluctuations can also be brought on by news or rumours regarding laws, security lapses, or technology breakthroughs.
• Technological development and adoption: Modifications to a blockchain protocol or broader consumer and commercial use of the technology can have a significant impact on a cryptocurrency’s price. Price changes that are abrupt and substantial may result from these adjustments.