These pieces of information seem to show an ecosystem that is both healthy, and continues to attract investors with confidence in its future. CVI is not a given, but it’s a good example of volatility within the market. By knowing the different types of events that can cause volatility for a particular cryptocurrency, an investor can use the index to understand how and why BTC and ETH do what they do. However, many cryptocurrencies experience their own volatility, like when Litecoin fell following the publication of a fake press release stating Walmart would be accepting payment with LTC. Understanding crypto volatility can be tricky, but there are a handful of broad reasons you can look at to determine why a particular cryptocurrency is falling. Volatility is nothing new for cryptocurrencies and, in fact, should be expected.

  • The cryptocurrency has often been seen as a hotbed for speculation, which induces market instability.
  • This, however, doesn’t mean that we can’t look at historical price charts to notice skyrocketing highs and lows of deflation that crypto values have experienced in the past.
  • When there are breaches in security, cryptocurrencies have to make the public aware.
  • In comparison, the stock market has a wide range of volatility where well-established large-cap stocks like Apple (AAPL) and Microsoft (MSFT) behave less erratically than small-cap tech stocks.

Both CVX and VCRIX measure cryptocurrency volatility, but use fundamentally different index methodologies, hence, the low correlations. To reduce pricing risks and avoid market manipulation, the contractual underlying of cryptocurrency options is often a spot price index that averages prices from multiple exchanges. This multi-exchange spot index method addresses the comparably low liquidity on crypto exchanges and is not typically found in option contracts on traditional assets. To reduce settlement risks, a price smoothing procedure is used right before expiry of the option. Such a smoothing mechanism is found in the settlement procedures of many financial derivative. In the example of Deribit, the exchange delivery settlement price (EDSP) is calculated using the average of the spot price index over a period of 30 min proceeding expiry.


We want to further investigate these joint dynamics before returning to the analysis of cryptocurrency volatility. In the wake of the most recent downturn, critics have doubled down on this point. But the argument misses an important insight about how crypto assets differ from those in traditional finance. Unlike traditional equity, crypto assets have liquidity and price discovery from the start. This does mean that crypto markets are more sensitive to signals and changes.

Figure 3 shows the expected Bitcoin volatility in hourly frequency as captured by CVX and CVX76. CVX is the model-free annualized expected volatility over the next 30 days, which is based on mid-prices for Bitcoin options (see Sect. 3.2). CVX76 is based on the Black 76 model implied volatility and interpolated from a volatility surface for each timestamp in the data (see Sect. 3.3). A very important benchmark and investment tool are financial indices, which allow investors to obtain information on the current state of the market. Furthermore, indices that are turned into tradable assets and derivatives thereon improve market accessibility. S&P 500 and Euro Stoxx 50, for instance, are two large indices that track North American or European stocks respectively.

In the crypto sector, BTC is considered the benchmark as it is the oldest crypto in the world. Equity fund managers compare the beta of a stock against a benchmark – like the beta of the S&P 500, an index that tracks the price of the 500 biggest companies in the U.S. Every element of the crypto sector is new and evolving daily, so it makes sense to approach cryptocurrencies with a degree of caution as well as excitement.

Naturally, as cryptocurrency spot markets evolve, markets for derivatives thereon follow. Of those, option markets offer the unique potential to extract volatility information that would otherwise be unobservable. We extract said information through a cryptocurrency volatility index (CVX) that captures the market’s expectation of future volatility.

Risk asset markets are heavily influenced by two human emotions – fear and greed. Positive news about a cryptocurrency can trigger bullish trends as investors speculate on future profits. We have seen endorsements from celebrities like Elon Musk as well as established brands like Meta (META) and Disney (DIS) helping fuel token price surges.

This is because there is an insufficient number of market participants and orders in the market to buffer against potentially large orders that can move the markets. Additionally, market manipulation is extremely rife in a low-liquidity environment. The relatively low liquidity of the cryptocurrency market makes it a hotbed for volatile price swings. The great market crash in 2018 is a hard lesson for many in the cryptocurrency market on the extreme volatility of cryptocurrencies. Within a space of 2 years, the prices of cryptocurrencies have vigorously fluctuation from end to end, with many considering cryptocurrencies to be a highly unstable market full of speculation and uncertainty. The first and largest cryptocurrency based on market capitalization – Bitcoin – experienced massive growth in 2017, growing from $700 to almost $20,000!

Mastering Crypto Market Volatility: Insights and Tips for Investors

The recent approval of a ETH futures contract offering is further evidence of this trend. Redditors and trading threads on social media tend to lead the conversation in terms of the crypto sector, large passive investors such as pension funds and asset managers tend to shape market direction and trends. Wild swings in valuation are not conducive to either the long-term decisions fund managers to need make, nor the steady returns expected by stakeholders. The above content provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such.

This also means that, despite being calculated 24/7 and only with the information and liquidity available at any given point in time, the CVX appears smooth and reflective of the underlying. The fundamental idea of volatility indices dates back to Brenner and Galai (1989), who envisioned financial instruments for the hedging of volatility changes. To measure such a market price for volatility, we are interested in the implied volatility for an ‘ideal’ at-the-money option with exactly 30 days to maturity. As such an option is not observable, this section lays out a methodology to extract the ideal option from related option contracts. The method generally applies to all crypto-assets, as long as there exists a liquid option market. Yet, the paper focuses on Bitcoin, due to the currently superior liquidity in Bitcoin options.

The crypto market has its own volatility index known as the Index. Crypto investors can use the CVI token, which is pegged to the Crypto Volatility Index, to hedge against market volatility. This article will help you understand the factors behind price fluctuations and learn about various risk management strategies that investors use to navigate through the uncertainties of the crypto market. Volatility in financial markets refers to changes in the price of an asset.

Crypto is still an emerging market.

A meme coin that may see a massive spike in the short term would likely be a poor choice to DCA into as it may not continue to perform well over time. One of the biggest benefits of using a stop-loss order is that it prevents emotion-driven decisions. Traders can instead be research-driven and set pre-determined selling prices to limit losses and book profits in volatile markets. We saw this trend play out in the 2022 bear market, where cryptocurrencies became increasingly correlated with equity markets. Both markets fell as global central banks embarked on an interest rate hike cycle in order to fight rising inflation.

Crypto investors need to be agile and adaptive to the ever-changing market forces. Yes, Statista allows the easy integration of many infographics on other websites. Simply copy the HTML code that is shown for the relevant statistic in order to integrate it. Our standard is 660 pixels, but you can customize how the statistic is displayed to suit your site by setting the width and the display size. Please note that the code must be integrated into the HTML code (not only the text) for WordPress pages and other CMS sites. There are multiple reasons that contribute to the highly volatile and unstable environment.