Volatile Markets: How to Understand Risks and Opportunities

Volatility is one of the key parameters that characterize the speed and scale of price changes of any financial asset. Quantitatively, it is usually measured by the standard deviation of annual returns over a specified period. For investors, a volatile market is primarily an indicator of the level of risk associated with their assets.

How traditional markets measure volatility

On stock and futures exchanges, volatility is constantly monitored by analysts. Specialists have developed specialized tools to track this indicator and attempt to forecast its movement.

The most well-known example is the VIX index of the Chicago Options Exchange. This index analyzes price movements of options on stocks in the S&P 500 portfolio and estimates the expected volatility over a 30-day horizon. VIX is often called the “fear index” in the American market, as its values reflect the level of investor anxiety.

The development of financial instruments has led to an expansion of volatility control measures. In 2014, CBOE launched a volatility index for 10-year US Treasury bonds, allowing monitoring of confidence in the bond market and assessing the risks of debt instruments. In currency markets, despite the lack of unified measurement standards, volatility remains a critical parameter for evaluating trading opportunities.

Cryptocurrencies: more volatile assets

The digital asset market demonstrates significantly higher volatility compared to most traditional assets. This is explained by the features of the cryptocurrency ecosystem: the digital nature of assets, the absence of strict regulation, and the relatively small market size.

This characteristic attracts speculative investors who see in volatile price movements an opportunity to achieve substantial returns over short periods. However, as the cryptocurrency market matures, a gradual decrease in volatility is expected due to the expansion of the market base, increased trading volumes, and strengthened regulatory oversight.

Tools for tracking cryptocurrency volatility

The development of the cryptocurrency sector has led to the creation of its own volatility indices. One of the first was the Bitcoin volatility index (BVOL), which helps traders and analysts monitor the level of volatile movement of the main crypto asset. Similarly, indices have been developed to monitor the volatility of Ethereum and Litecoin, providing detailed insights into risks and opportunities in specific segments of the cryptocurrency market.