What is volatility?

Think of two car journeys: one is smooth and the other is full of potholes and sharp bends. They may end up at the same place, but the ride is very different. Something similar happens with crypto prices.

In a hypothetical example, two coins start the week at €100 and close it at €100 again. The first moves between €99 and €101 in the meantime, while the second drops to €80 and rises to €120. The final return is the same, but the second has gone through much sharper swings.

Volatility is usually calculated from how much the percentage price changes differ from their average. That’s why, when we compare two measurements, we need to look at the same time period and method. A daily measurement can’t be compared directly with an annual one.

Why it matters

If you hold crypto, volatility affects how much the value of your holdings can change in a short time. It doesn’t show the market’s direction: high volatility can come with a sharp rally just as much as with a drop.

In crypto, news, changes in demand, limited liquidity and mass liquidations of positions can amplify price moves. When there are few buy and sell orders available close to the current price, even one relatively large trade can move it noticeably.

What to watch out for

Past calm doesn’t guarantee future calm. A coin that has traded in a narrow range for a long time can suddenly show big swings. Also, low volatility doesn’t mean the absence of other risks, such as a security breach or being unable to sell.

With leverage, a relatively small price move can cause a large loss or the forced closing of your position. In sharp moves, even a stop-loss order doesn’t guarantee execution at the price you want. We consider volatility a useful measure of price risk, not a full assessment of a crypto’s safety.