Naturally, volatility is an aspect of market activity. In a financial market, volatility refers to the fluctuation of the price or value of an asset. This aspect of the market activity is healthy as long as the steady decrease or increase in price lies in the broad range. However, volatility can be extreme if the price suddenly moves in either direction.

In a regular market, healthy volatility has several purposes. However, it mainly creates profitable opportunities for investors. For instance, changes in stock prices enable traders to purchase low and sell high. On the other hand, extreme volatility happens if the value of an asset changes rapidly in a short duration.

While Bitcoin is among the essential economic inventions at the moment, it is a highly volatile asset. This virtual currency has converted some individuals from astute banking leaders to experienced CEOs and ardent supporters. However, Bitcoin is an unsuitable investment for some people due to its geopolitical uncertainty and perceived volatility. Thus, people don’t see it as a good value storage.

Bitcoin Volatility History

From a historical perspective, Bitcoin data shows how this digital asset price can suddenly change within a short time. For instance, the top tercile for Bitcoin volatility has exceeded 79% since October 2014. Experts and traders measure volatility by sampling how far Bitcoin’s price moves from a fixed-point price. And this can even be the opening price of Bitcoin on a specific day.

The daily volatility calculation formula is the standard Bitcoin’s price deviation. And people calculate the standard deviation as follows: √ (Bitcoin’s price variance).

Here’s how to calculate the price variance of this virtual currency:

  1. Sample the price of this virtual currency at different points during the day- Let call the sample numbers “N”
  2. Calculate the Opening price – Nth price) ^2
  3. Sum up the results= ∑ (Opening price – Nth price) ^2 /N
  4. The answer is Bitcoin’s variance.

The daily volatility of this virtual currency is its standard deviation which is, √(∑( opening price –Nth price)^2 /N). Since this formula uses Bitcoin’s value, the volatility measure unit is the US dollar. However, you can use percentages to display the volatility as a percentage.

Reasons for Bitcoin’s Volatility

Any asset with a small market cap is generally volatile. That’s because the daily buy and sell orders affect the value of the currency. The current Bitcoin market cap is around $350 billion. On the other hand, gold has a market cap of approximately $3 trillion.

Experts calculate market capitalization by multiplying the Bitcoin tokens in circulation by each token’s price. Bitcoin has a supply limit of 21 million. And miners have already reached 88% of this amount. Therefore, the most significant influence on the cryptocurrency’s market cap will be via price changes. Bitcoin’s price changes will be minor once its price increases to increase the market capitalization.

Demand and supply are currently the main factors affecting Bitcoin’s price. The more people demand this virtual currency, the higher they will be ready to pay to own it. And this increases its market price. Bitcoin price is the last amount people spend on a crypto exchange. Today, people purchase and sell Bitcoin on several cryptocurrency exchanges. Perhaps, you can visit Immediate Edge to start trading in bitcoins.

Essentially, the price of this digital currency will vary at any time because each crypto exchange has varying ongoing trades. Thus, while price differences between crypto exchanges may be minimal, the gap may develop, creating opportunities for Bitcoin arbitrage.

Final Thoughts

Bitcoin remains a highly volatile asset, meaning that price can change at a rate of 5-10%. And this volatility hinders some businesses from accepting Bitcoin as a payment method. It also makes it a nerve-wracking asset for some investors. Nevertheless, experienced traders take advantage of this volatility to make excellent profits. But while this virtual currency matures, it will become mainstream, increasing its price while decreasing volatility.