What is Volatility

What is Volatility

How It Works
14/12/2021 by Koinal
Volatility is the measurement of how much the financial value of a specific asset has changed over time. An asset is considered to be a risky investment if it is very volatile. However, it also can provide investors with higher returns in a shorter time compared to less volatile currencies.
What is Volatility

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Cryptocurrency, the famous new class of assets, is considered to be highly volatile and for the same reason, it has the potential to create significant gains in shorter times. Stocks, including relatively stable large-cap ones and often unpredictable “penny stocks,” are considered broader volatility. As for bonds, they are treated as having lower volatility and thus, they have less dramatic fluctuations.

Volatility can be measured in different ways as there are different types of volatility. Historical volatility, for instance, refers to observing past changes in the price of a particular asset within a specified period. Implied volatility, on the other hand, refers to predicting prospective movements. It is called “implied” since it is impossible to predict what is ahead of us accurately. Although it does not give precise results, it is adopted as a method by several financial tools.

Volatility can be measured in many different ways:

  • The method “beta” measures the volatility of one stock about the overall market.
  • By measuring the standard deviation of a particular asset, one can understand how much the price deviated from the average.

Volatility is crucial to measure when analyzing the risk of a prospective investment. It is not the single factor of analysis, though. If investors think that the big reward is worth taking the chance, they will invest in that asset anyway. HOWEVER, the $20 billion amount of loss of the hedge-fund manager Bill Hwang is an example of things that might not go well all the time.

To avoid the risks that volatility brings, investors are recommended to diversify the asset classes in their investments. They are also advised to pair their investments in the volatile class of stocks with those in the less volatile class of bonds.

The worldwide famous new form of assets, cryptocurrencies, are seen as even more volatile than stocks. However, its volatility seems to be decreasing with the impact of higher trading volumes on the most significant crypto, bitcoin, and growing individual participation.

Some investors of cryptocurrency think that volatility is part of the game and is why high returns are possible. Even Bitcoin, as the coin with the most increased trading volumes, still experiences wide fluctuations and thus allows for investors to “buy the dip.” However, some investors do not care about small losses due to short-term volatility as they believe that the price will increase over time. Other crypto assets are called stablecoins, such as Dai and USD Coin, for those who prefer moving more cautiously.

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