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The crypto market is a space that is filled with plenty of opportunities; it is the latest inclusion within the financial market sector because it has only been ten years or so since the launch of the first flagship currency by the name of Bitcoin. The crypto market does present you with tons of opportunities in terms of investing in various arrays of cryptocurrencies, including Bitcoin, Ether, XRP, BNB, Cardano, and many other cryptocurrencies as well.

The idea behind every cryptocurrency is potentially the element of active trading, and it goes like you log on to a particular crypto exchange out there that facilitates you with the purchase and selling of cryptocurrencies, you sign up with that particular platform, and then you punch in your financials in there for buying cryptocurrencies that you are generally interested in.

You buy that cryptocurrency in whatever capacity you presently have financially, and then you wait, you wait for prices to soar, and when there is a well-established element where you can turn in a huge profit for your initial investment, then you trade all of these cryptocurrencies or investment that you have made away.

This allows you to make a proper profit on your investments while keeping the ball rolling, you can use some of the profit in your own living expenses or whatever you do, but the original investment must be reinvested if you want to make a consistent living out of this very activity.

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This is how the game of crypto trading works; if we go in a little bit more depth, then you would come into the of other offerings that are only available to mature players of the crypto world. You can diversify your portfolio by investing in a lot of cryptocurrencies and their derivatives that are traded in the name of exchange-traded funds.

Exchange-traded funds allow you to have a bit more indirect approach towards cryptocurrencies where you don’t buy cryptocurrencies directly, but you buy their bonds that are backed by the government and other official entities. This way, you are actually cutting down the volatility factor of the crypto market.

We will be talking in great depth about volatility, such as what it is and how it can affect your trading patterns or trading volume within the crypto market. You must be aware of the fact that it is a real mood killer; volatility kicks in within the crypto market like it doesn’t ever in any other financial sector.

What is Volatility?

Volatility actually measures the overall decline or scaling up within the price of a financial asset over time. Let’s presume or take into account an example to better understand this element.

One Bitcoin, when first launched, was being sold for pennies on the dollar which means relatively very cheap, but people were not interested in Bitcoin, the flagship of digital currency, because of the fact that they believed this whole ship was bound to fail, they didn’t think that Bitcoin would turn into this great sensation in the upcoming years.

So some investors with experience within the financial sector and who truly understood the value of Bitcoin invested heavily at the very beginning.

A few years later, the price of Bitcoin started to show up, it began to go up in value, and the profit return was 500% to all the way to 3000% or even more after ten years or so. Those investors who invested in Bitcoin all those years ago when it was basically nothing were reeling in huge amounts of profit by selling it after the market established itself and Bitcoin was a strong financial asset.

So the volatility factor in this case scenario is positive; bitcoin’s value increased over time, but when we talk about the all-time high price factor of Bitcoin, say in 2021, when it reached $65K and then the decline began.

Today the average price of Bitcoin is anywhere from $30K to $35K, and it is still dwindling in between; it is having the toughest time trying to break over that particular barrier, and one could say that volatility once again has been immense but in negative value.

This is how volatility works in financial sectors; assets lose their value over time while some assets scale up in value and are all about market conditions, how things are turning up, and how confident investor is around a specific cryptocurrency or financial asset and in whom they are investing.

It is safe to assume that investors are not at all confident in Bitcoin these days, and that is why they are exploring other cryptocurrencies and offerings of the crypto market, which is why the attention of the investor is not primarily on Bitcoin.

If an asset is extremely volatile such as if its price is changing not in counts of days or weeks but in mere hours, then that specific asset is termed as riskier and completely not recommended by financial personnel as well.

Therefore, whenever you deem to invest your hard-earned money into a financial asset, then, by all means, look into its volatility count; if it is less than it usually means that the asset is comparatively good with regards to other such financial elements and that you have a green light to move into its particular direction.

Volatility in the Crypto Market

Whenever you invest your money into a dedicated financial asset, you are hoping that after some period of time, you will be entitled to some kind of profit, even if it is not huge but comparatively greater than what you originally invested.

This is the very definition of financial investment, and it doesn’t matter which particular market you are eyeballing; it might be the crypto market, forex, or stocks market; no matter which particular market it is the same strategies and elements apply everywhere.

Most investors typically give in to their desires and let their wishes do the talking while they shut down their brains which usually means that they neglect their logical and rational thinking, and that is when they bear heavy losses.

You are taking a bet with a volatile asset that is really above your punching weight, and hence when the market shifts, you are either going to get a punch straight to the eye, or you would be able to deliver a knockout to the market itself. It is all subjective and depends on the volatility graph of whatever financial asset that you have chosen as a mode of investment for yourself.

As explained earlier crypto market is relatively newer as compared to other financial elements such as forex or stocks, and that is why it is naturally presumed to be more volatile as compared to those specific financial markets.

There might either be a significant upward movement or extremely consistent downward trends that could be seen across the charts, and this is something that really gets you thinking about whether the crypto market is for you or should you completely ditch the idea of investing in a market that is so much complicated and filled with volatility and try your luck somewhere else?

The answer here is also subjective, you must not jump into the crypto market for the significant advantage of turning huge amounts of return on your original investment, and neither should you skip out on this particular enterprise because it is just too volatile.

If you can develop a strategy that reflects integrity and rational decision-making on your part, then, by all means, you can reduce this volatility index for your particular asset by a significant value. It is not being said that you would completely be able to root out the volatility factor from your investment because no matter what specific market you are exploring and in whichever part of the world, volatility is always going to be there, and it is going to follow you like a hawk.

What is being said here is that if you communicate properly with the relative trends and metrics of the market and you study your financial asset in which you are willing to invest your hard-earned money, then basically, you would be able to lessen the blow that will be received by you should the market turn negatively towards you.

It is a well-established strategy that requires tons of research, and for that particular matter, most people just do the diving; they are afraid of investing in crypto, but when they see huge quarterly returns in some instances and their friends and family or their other associates make tons of profit they just want to let themselves into their activities, and they just dive in.

Usually, the end result was hurtful; they got knocked down pretty well by the market because when they chipped in, the trends were different, the data was interpreted with different results, and they were not big on research or making sure that their investment is on the right horse they took the fall.

When we talk about the stock market, yes, it is more stable as compared to crypto and forex markets because these are based purely on financial entities that could be converted literally into a Fiat value right then and there, and that is why both forex and crypto market is more volatile.

Are Stock Markets Lass Volatile than Crypto Markets?

Stock markets are less well volatile because of some of the large-cap stocks that they offer of S&P 500 companies from around the world; these stocks are known to perform better and better consistently because of the fact that those companies are just going to deliver excellent performance every quarter.

That is why returns keep on coming, and the volatility factor is almost negligible, but still, it is there you can’t root it out completely.

Bonds, on the other hand, are considered to be of the least volatility because these are backed by so many securities and official financial entities confirming each and every bond for its performance down the road.

Because of this activity, bonds see fewer upward and downward trends, and therefore their value remains in a tight window where it is not offering too many returns and, at the same time, is not blasting your initial investment by large-cap. That is why in the long term, bonds are considered to be a safer and more efficient way of investing your money where it consistently grows into an epic return after multiple years.

How to Measure Volatility

Volatility, just like any other table or contextual measurement, is a value, but it is not measured as other different elements are; there is no proper way or a device through which you can measure the volatility of a financial asset.

The true depiction of volatility for a dedicated asset is actually determining its historical volatility; it refers to a particular number that is derived after a careful study of the previous patterns of that specific asset that went downwards in value and at what specific time periods. It can be any potential time period, but usually, a 30-day time period or a whole year is taken into account when determining the value of a particular asset.

When you have that kind of data with you, may it be gold, Bitcoin, or some other stock that you are eyeing up and want to invest in, you can make a more calculated decision that is backed by careful evaluation of data. When you have that kind of data with you, you can presume how the asset is going to behave in the future; this element is known as implied volatility.

What you are doing here is that you are implying the previous volatility data for that particular asset and are imagining how it would react in the future. This is not an exact science; it is just to make sure that you are not shooting arrows in the dark and that you have a target to whom you should be directing your arrows.

It is all subjective, contextual, and based on predictions; no one is able to predict what is about to come next or how these assets are going to behave under different market conditions and global factors taken into account at a given point in the future.

Therefore multiple indexes, greed and fear index, financial tools, and other such elements are taken into account, and they have one basic agenda, and that is to churn data and process it in real-time referring to that particular asset.

The data is calculated by multiple computers and other simulated tools, and they pull up a particular volatility index for that particular asset, and you choose to make your future trades.

There are multiple ways using you can quantify volatility for a particular asset. Such as, in the stock market, there is a specific method by the name of beta which allows you to calculate the volatility of a particular stock in relation to the broader market if you want to know about the performance of a particular stock that is not in the S&P 500, all you have to do is to run the beta benchmark for that particular asset which will help you to find out its performance against the S&P 500.

Another way to do that is purely mathematical, which involves computing the standard deviation of the asset in question, which basically measures how incredibly the price of a dedicated asset has diverged or deviated from its historical average price.

This will give you a really good example of where that particular asset stands today and what kind of trades you can make, and what specific things you should be on the lookout for.

Why Is It Important to Understand the Concept of Volatility?

There is a term used in the financial industry by the name of investment risk or marketing, which measures how riskier an investment is as compared to some other.

It also basically means that you are running multiple benchmarks and trying to simulate data in a particular scenario to find out just how riskier or stupid your next investment is going to be; this gives you a really good insight into what you should be expecting in the near future.

This allows the investor to assess the situation beforehand or if the risk is higher for a particular trade or transaction, but at the same time, the rewards are also pretty significant than some of those investors who have the capital and experience with that particular kind of trade would just jump in on this opportunity and would take it all the way to home.

On the other hand, those investors who lack the capital and experience to put themselves through this kind of pain and bad experience would just step away from that trade, saving them months of regret and heavy potential losses which they would otherwise be claiming from their trade.

That is why it is essential to understand the volatility of a particular financial asset moving forward. Suppose we remove the necessity to find out about the volatility of a particular financial element; how can you ever know if that asset is going to present you with a gigantic reward at the end or if you will be losing your original investment as well?

That is not rhetorical, it is just impossible to know this for sure if you don’t have the data beforehand, and that is why there is a serious need to know more about the volatility aspect of these financial assets before you put in your hard-earned money into the mix only to regret it later.

There is something that you can do at the end of the day to make sure that your trade stands out from the rest, and that is to diversify your portfolio; you can’t invest in multiple entities at the same time, which means that even if some of those take a heavy hit, you will be compensated for the loss of your initial investment by the profit that you make on some of the other financial elements that you have invested into.

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Larry Wright

By Larry Wright

Larry Wright is a Pulitzer Prize-winning journalist and author. He is known for his insightful reporting and his ability to delve into complex issues with clarity and precision. His writing has been widely acclaimed for its depth and intelligence.