Crypto volatility is a blessing and a curse. Digital assets are known for their wild price gyrations in the marketplace. They go up all the way and then dip down to a certain price level before coming back up again with great vigor. The aspect of volatility is why your neighbor and your grandma were asking you about the leading digital asset bitcoin and how they could invest in it in 2017.
But of course, depending on when you invested in 2017, and for most people, it was in the latter half of 2017, you might not have seen a significant return. Still, many people are not aware of the underlying technology present within bitcoin and other crypto-assets and why it matters. As such, more volatility is bound to be present as more people follow other aspects instead of the essentials that drive bitcoin and other digital asset prices.
Bitcoin still remains a somewhat volatile asset as it can go up and down in the near term in wild swings. As noted above, as people still try to wrap their minds about blockchain and why it matters, the media, and other institutions fan the flames of volatility and uncertainty.
Remember that more people want to know if it is worth anything or if it is worth nothing. As individuals seek to solve this fundamental aspect, you will have several huge spike cycles over the next few decades. That is the consensus opinion right now, more volatility is on the horizon for bitcoin and its many family members.
What is compelling about bitcoin is that it can go up quickly and down in the same fashion. It doesn’t spike up in a shy fashion but in a substantial fashion. That’s intriguing because people can make significant gains on their investments. Conversely, in stock markets or bond markets, the increase and decline may not be that much.
But to genuinely understand crypto volatility in the markets today, you must understand volatility. So, let’s talk about volatility in the general sense and all aspects about that before we dive into more in-depth topics such as cryptocurrency volatility indicators.
Then we will dive into the indicators and understand the volume and other aspects related to volatility in crypto.
What Is Volatility?
Volatility is the level or rate at which an asset’s price will trend up or trend down for specific factors of returns. The rate matters because it indicates the opportunities for value capturing and adding substantial gains to a portfolio.
Traders measure volatility by defining the standard deviation of within year terms for a specific time segment. Again, the range shows the price movement from one level to the next level.
Investors and traders view volatility as a way to check the level of inherent risk present within a given asset. Traders will integrate volatility into the option pricing formula to measure the movements in the present return potential of the digital currencies or stocks that it is based on.
Not only can you measure risk, but you can also notice general behavior related to price within the digital asset and enables individuals to check out the potential variations that may take place in the near future.
Investment mavens will view the level of volatility by assessing beta values in relation to a larger benchmark. For instance, one could measure the technology company, Apple and it’s stock to the Dow Jones, or some other index. If one were dabbling the digital asset markets, one would compare the leading digital asset, bitcoin, to the Bloomberg Galaxy Crypto Index.
Now, if the digital asset were to move up quickly within a small time frame, the higher its volatility level if it does in a more snail’s pace manner over the short or long term, the lower volatility it will have.
Note that volatility relates to the price movement’s frequency and the impact of the price on a financial instrument. Simply said, volatility is the variance and speed in price movement within the market.
Yet, one of the aspects you see here is that if a digital asset were to hold the same price over a short or a long term, there is no action, no real possibility to trade. That would be as exciting as a stablecoin, an asset that will be stable and would allow you to invest money in it, sit back, relax and collect interest on it, if possible, through different means.
But that means there is no opportunity for those who trade these assets to earn any money actively. That is why speculators appreciate volatility because it means there’s more potential for gains while it goes up and down.
Yet, it is essential to declare here that novice investors can act in an illogical manner, make a variety of wrong decisions, and decrease portfolio value. Conversely, competent and intelligent investors can generate value and increase their portfolio value in times of substantial volatility.
Indeed, that is why proficient speculators have come to adore the volatility inherent in the cryptocurrency sector. They want to see the price move, capture opportunities and take advantage of more volume present within the sector.
The issue with low volatility markets is that it seems as if there is no market. Think about if an asset didn’t go up or down in price, then what is there for you take advantage of in those times? You certainly cannot make many profits in those timeframes. What are you going to do? Wait. You know that there is minimal action and that markets do not have as much liquidity in most cases.
Another component of volatile markets is that you are likely to see more directions to the upside or downside. To clarify, this means that you are able to see regular movement in one or the opposite direction, instead of just dead markets.
But be careful when dealing with digital assets as they can provide a great boost to your portfolio and then rip it apart depending on the mood of the market. That is why volatility is seen as a double-edged sword by many people within the cryptocurrency industry.
Let’s find out more about the inner workings of volatility in financial markets.
The Inner Workings of Volatility
Always think about investing in the aspect of risk. To be clear, the more capital you invest, the more risk you could take on depending on the investments. Now, volatility is an integral risk in the many risks you take on investing. All financial instruments will have the aspect of price movement, which makes them genuine and robust.
In essence, the market looks at underlying conditions within the asset and then will act on price, either pushing it up or down, depending on the positive or negative activity present within the asset.
For instance, if it is a company, the market will watch for earnings, fraud reports, and other components that will affect the company’s health and push or pull the price accordingly. Further, the market will also look for pandemics, political turmor, and other aspects that will affect the market and potential returns.
The price movement for many publicly traded assets will occur per day. In most cases, investors do not have any way to control volatility, except to push it in different directions after it takes place.
Further, assets across the board will vary in volatility; stocks will have (in typical situations) medium to high volatility. Bonds will have (in most cases) even less volatility due to their perceived safety. But crypto, that’s a whole different story.
We see much more volatility in this digital asset sector. But you will see even more nuances within assets based on the quality of the asset. For instance, think bitcoin versus your random pump and dump coin that comes with the names of TrumpCoin or KimJongUn Coin.
People will also look at the beta values of digital assets where a beta value over 1 is where you take on more risk, and below 1 is less risk and less volatility. As noted earlier, 1 is the standard based on the benchmark, and everything revolves above or below the norm.
Volatility Indicators in Cryptocurrency
What are these volatility indicators in cryptocurrency?
These indicators are factors that will help you to assess volatility general and digital asset speculation markets. If you look at indicators, you can improve your speculative activities and maximize for higher quality outcomes.
While bonds and stocks have been around for longer and have more data, cryptocurrencies have more upside because of their early market stage.
A few indicators help to assess changes, and we will cover these right now. Here are the most prominent one’s so far:
Average True Range
The concept came about in the early 1970’s. The person who would devise this concept was a man by the name of J. Welles Wilder Jr. He came up with the concept because he wanted to look at the variances and volatility within the commodities markets.
This technical analysis indicator will measure the general volatility present within the marketplace. It does so by viewing the range present within bitcoin or ethereum or cryptocurrencies for a specific period.
How Does It work?
Conduct these calculations:
- The difference between the present high minus the present low
- The value minus the past close
- The present low minus the recent closing price
We see the true general range as the moving average of the several true ranges combined together. Speculators tend to turn to more compressed timeframes (usually 14 days) to create more buy or sell signals. The general consensus is that more extended periods have less likelihood to create trading signals.
Let’s look at an example;
A short to mid-timeframe trader desires to measure a financial asset’s volatility over ten days. The speculator would calculate the ten-day ATR. Let’s say that the previous information is present from most recent to the furthest day.
The trader will look at the largest value of the present high, lower the present low, the absolute value of the present high less the most recent closing price, and the absolute value of the present low less than the previous closing price.
The trader will do the calculation for the ten recent speculative days and will average it to see the primary value of ten-day ATR.
How Does the Average True Range Help You
The straightforward way to look at ATR is to note that the higher the ATR, the higher the volatility. Conversely, lower volatility in bitcoin will have a lower ATR. It lets you know how much an asset will change in price over a set timeframe and can help you to chart profit targets.
Assume bitcoin moves $100 a day, regularly. We don’t see big news but bitcoin is now up $220 for some reason. The range (highest point minus the lowest point) is $120. The price is moving over 40% from the recent average, and you are seeing more action; you might even be interested in adding to positions as it shows great market sentiment.
But then you might think again, and the asset broke out of the average trading range, will it continue further or is it going to go back to the average? If you are looking at past data, you will think that it is better to stay within the range. You might even short it.
But you are looking for the signal that will help you to make the best decision. ATR can help you to verify a thesis.
That, in a nutshell, is what the ATR, combined with other techniques, is good for.
Let’s dive in a bit more.
You will look at the ATR to enter a trade position or get out of one quickly. That is why it is a fascinating tool to add to your trading mechanism. It was brought about to enable speculators to be more precise in their day to day volatility measurements without the use of complex calculations.
Now, it is essential to note that this indicator does not let you know about the growth of the direction of the price. Rather, you are able to know about the volatility due to the gaps and limit increase or declines. Further, you only need past data to calculate this indicator. People appreciate this because they can make decisions on getting out of trade regardless of when they took part in the entering of the trade.
Within this ATR technique, we are aware of components such as the chandelier exit. This is where you place a trailing stop right under the highest point after you opened a position in bitcoin. We see that the range between the highest point and the level of the stop is a multiple that you multiply by the ATR. For instance, traders will subtract 3x the value present within the ATR from the top point post-trade entrance.
The next critical value of the ATR is that it can give you an idea of how large a trade you should make while playing in the derivatives arena. Speculators appreciate the fact that you can utilize the ATR technique to look at sizing your position and integrating your level of risk through the lens of volatility.
Detailed ATR Example
Let us take a look at an imaginary scenario, the first point of the ten-day ATR is noted at the 1.31 and the eleventh day has a true range of 1.08. The sequential ATR value could be noted by multiplying the prior ATR value by the number of days minus one.
Then you would add the true range for the present period to your result in the other calculation. Finally, divide the sum by the specific period. Let’s break it down, the second value estimate is (1.31 * (10 -1)) + ((1.08)) / 5.
There Are Drawbacks to the ATR
The issue is that it is not absolute, and you can see the results differently from other people. For instance, you can look at the numbers that you and your peer got but can draw different conclusions. You will not have a definite idea of where the price will go next.
Always look at present readings and past readings of the ATR to view potential trends.
The next component is that ATR provides volatility clarity but leaves out further information on trend direction. As such, speculators must be quite careful when they are looking to the ATR to conduct in-depth analysis on predicting the future.
Different people can see different things when viewing an ATR and trying to chart the price forward. It can be even more difficult as the market moves in a manic manner.
Summary of ATR
You can read this in a very easy way. The ATR rises with growth in price variance. As such, if you have large levels of volatility, you have higher ranges in the ATR.
Of course, as with new indicators, you will see that many of these indicators will not occur by themselves, you must pair them with other factors to position yourself in the markets.
Professional traders will think about volume, about the energy and sentiment in the markets, as well as the direction. We can see aspects such as the oversold factor, the simple moving average, and other factors.
Do not expect this one to give you much information into other aspects of the market. No, you will use this with other components to make long term decisions or even short term ones.
Bollinger Bands
Bollinger bands will let you know about the sentiment of the markets and assets. Specifically, it will tell you when markets sell too much of an asset and buy too much of an asset.
The beauty of Bollinger bands is that they provide you with compelling imagery when it comes to the level of relative volatility present within a given asset at a specific point in time. It is a technical analysis tool that will rely on the simple moving average that will have a top band and bottom band. You can gain this information from a simple standard deviation approach.
The founder of the approach will insert these into the system:
- 20-period simple moving average
- The Top band (simple moving average plus two standard deviations)
- Bottom Band ( the simple moving average minus two standard deviations)
The Bollinger Band approach works by contracting and expanding as the price volatility gyrates to and fro within the markets. You can also rely on these other tools as well.
These include:
- The Bandwidth – it is a tool that literally measures the width (or distance) betwixt the upper and lower band. It does by subtracting the lower band from the top band.
A quick note about this approach is that when you see the BW is at a very low point over six months, it could be a squeeze potential. You can see that it might be compressing before it shoots up or descends. Of course, the market could fake you out, so make sure to look at ways to protect yourself if it were to turn against you. Remember that derivatives can help you in this situation.
- %b is an approach that lets you know more information about the price in relation to the bandwidth. You calculate this by tapping into George Lane’s Stochastic indicator, that will have numbers ranging 0 to 100 when the bitcoin price is at the band level or betwixt the bands. You can take advantage of this when it is at 0 when underneath the lower band. Finally, when it is more than 100.
When you are using the %b approach, you want to view the verification from a few indicators and then look at the price movement within the trends and potentially predict the future. Next, you will want to check what is taking place with current and future events and how that might impact the present and future price.
In a world where more people are shifting online and seeking to utilize the internet in more ways than one. It is one where people are jumping into the cryptocurrency sector, and purchasing assets for one thing or other, there’s bound to be activity that could affect the general cryptocurrency world as well as individual token prices.
In such a case, it is best to look at the bands, the top and the bottom one, as well as the middle one to see activity. You want to look at these for price normalization, more data, and much more information. Different components of the cryptocurrency sector will experience positive and negative activities that bring about intriguing trends.
There are situations where market-based rallies can move all digital assets up. Indeed, this is what we’ve seen in the past. But it is important to note that the depth and the length of trends within specific units can differ.
We will see that specific principles will relate to these techniques:
- When using %b with different digital assets and specific segments, it is best to do so, coupled with more techniques and price components.
- Those that have slumped values in %b mode will tend to be in a negative sentiment when you look at it with more indicators and price data.
View Bollinger as a way to not look at an extension in prices in a Bollinger Band but how strong the price action is and if a potential breakout can push forward. Bollinger Bands can help you look for pullbacks when viewing it from the lens of the moving average. It can help you to establish a starting point and when you should exit a position.
You can note the range in price between the movement of the several bands. As such, you see volatility and take specific actions based on that.
Bitcoin Historical Volatility Index
You can look at bitcoin and other components through derivatives and other aspects.
We can look at the Bitcoin Historical Volatility Index to understand general information about volatility in the bitcoin markets. You are looking at the movement based on the price variance. An increase in volatility will beckon more risk.
Beta Value
If the value is below one, the asset is less risky. Conversely, if it is above 1, then the asset value will be a bit riskier.
As you can see, the beta value is a critical component, but it is useful when combined with other pieces of information.
Volatility Indicators and Value to You
Volatility indicators are great to use with derivatives, hedges, and other components like binary options. They can be powerful aspects of your overall trading strategy and create substantial profits if used correctly. But remember that people appreciate these tactics because one can utilize these to earn money without having to understand where the digital asset will go in the future. To be clear, you do not need to know if it will go up or down directly if you know how to assess it wisely.
That is why you want to turn to volatility indicators (technical indicators) to see how you can appreciate your portfolio without having to combine massive amounts of information.
These indicators will bring in the data that was present within the past, utilize formulas and present the results in a manner that enables proficient speculators to rapidly comprehend what is taking place and what will likely occur in the near future.
Now, these technical indicators have a strong concentration on the price and general movement. Volatility indicators do not care about the fundamentals such as the number of holders or automatic adjustments to the coin generation algorithm.
Conversely, they will input what took place in the past, and let traders know what might happen due to the past data. As such, you can make your analysis accordingly with a fresh outlook on the markets.
These technical indicators fall into a unique category because they allow you to comprehend how much variance there is between the current asset price and the average asset price. Specifically, they allow you to think about how much of a difference is present and if there are potential opportunities to trade because of this variance.
- High Volatility is abnormal price action and way off the average, which means that it is something to pay attention to. A wildfire is unusual activity in some areas, and that indicates significant volatility. Things were smooth for a while, and then, bam! Out of nowhere, a wildfire appears. The wildfire might rage for a while and create substantial destruction and long-term value. Things are different for a while in the short term, and then things change. Those digital currencies that have large volatility are those that experience more wildfires. These assets are trading quite far from their averages.
- Low Volatility – in a low volatility environment, you see that markets have made up their mind and the asset generally moves in one direction. The direction can be positive or negative but they are going to be more in line with the averages.
You want to use crypto volatility indicators because they will help you see what is going on and take the necessary actions to position yourself for what may happen in the near future.
We know two things for certain when it comes to volatility indicators:
- They can be of the oscillating nature
- They can be those that act as channels
Oscillators will assess value and then present it in a different chart, right underneath the price chart in most instances. The present value and its ties to historical data enable traders to draw conclusions and make predictions of what others perceive the market to be like and what they might do.
Channels will utilize volatility to compute the price channel and present this channel into your primary dashboard. The channel focuses on the present market price and can show the range in which the market will stay at for the present time. Those that predict significant variance from average can cause consternation, which may lead traders to bet on reversals so that the market goes back to average levels.
We covered these tools with Bollinger bands, the average true value, and other components and believe that you are now more proficient in volatility.
Remember to never get complacent in trading, to continue to do the work and to have fun.