What is Volatility?

Volatility is a measure of how much the price of an asset fluctuates from its average price over a given period of time. It helps assess how risky an asset can be, and standard deviation is a statistical measure that’s often used to analyze how volatile an asset is.1

Volatility and cryptocurrency

One of the potential barriers to widespread cryptocurrency adoption is volatility. A cryptocurrency could be worth $10 today but drop to $5 or grow to $15 the following day, representing a 50% move in either direction in a single day. This volatility in crypto assets has drawn the attention of speculators and short-term traders who seek to profit from such price movements.

Stablecoins can help reduce volatility in comparison to digital currencies like Bitcoin. Although it’s possible for stablecoins to break their 1:1 peg, fiat-backed stablecoins are pegged to a currency like USD and designed to hedge against market volatility.

Example

Jenny buys a burger at McDonald’s for $1 and pays in Shiba Inu. If the crypto price drops by 20% right before she pays, then she would only have $0.80 to pay for the $1 burger, and she wouldn’t be able to purchase the burger due to price volatility.

References

1. What is volatility? Fidelity International.

Please note that this article is for informational purposes only. The example above is for illustrative purposes only. Actual crypto prices may vary depending on the market price at that particular time. Alpaca Crypto LLC does not recommend any specific cryptocurrencies.

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