Bitcoin Volatility Index: What is it and how to use it?
The volatility index is a measurement used to gauge the level of uncertainty or variability in the price of a financial asset, such as a stock, commodity, or cryptocurrency, over a specific period of time.
In the realm of cryptocurrencies, the volatility index is predominantly used for Bitcoin and is termed BVOL (Bitcoin Volatility). Based on timeframes, BVOL can monitor daily variances (BVOL24H), weekly changes (BVOL7D), and more.
How is the volatility index calculated?
The volatility index functions as a derivative tool. While its determination varies across the majority of exchanges, this is largely due to each platform utilizing distinct coin rates, liquidity metrics, and time intervals. Generally speaking, BVOL illustrates the fluctuation in an asset's average price over a designated period.
To gauge the daily BVOL, one must ascertain the asset's movement amplitude relative to its day's price. If an asset holds a $10,000 valuation and experiences a $2,000 amplitude throughout the day, then the BVOL would approximate to 0.2. It's noteworthy that the asset doesn't have to show a definitive increase or decrease over this period; any movement, whether ascending or descending, is taken into account.
How does BVOL affect the BTC price?
BVOL provides insight into traders' interest in BTC. There's typically a direct correlation between the volatility index and the trade volume: a higher BVOL signifies more substantial trading volumes.
There are certain dynamics between BVOL and BTC:
- A high volatility index signals a gradual reduction in price movement, raising the chances of observing a sideways trend in BTC's chart.
- A low volatility index, on the other hand, can be an indicator of a possible price spike, either upwards or downwards.
The volatility index is cyclical and exhibits a wave-like chart pattern:
BTC BVOL24H (tradingview.com)
This is equally true for the weekly volatility index: its structure mirrors the daily BVOL, but its qualitative metrics surpass those of the daily rate.
BTC BVOL7D (tradingview.com)
Where can you trade the volatility index?
In the past, FTX offered a vast array of volatility indices. However, after the controversies surrounding this platform, the derivative has seen diminished popularity, now mainly serving as a supplementary tool for analysis rather than a primary investment tool.
Now, you can trade BVOL on a few select cryptocurrency exchanges, including BitMEX. When engaging with this index, it's essential to tread with caution. It's advisable to consistently monitor the order book since the prevailing market price and the immediate trader order levels might show considerable variation, often due to liquidity shortages in the trading pair.
Final words
BVOL offers an insightful glimpse into the cryptocurrency market's dynamics, forecasting potential upticks or downticks in trader engagement. This index can be a handy tool for both short-term trades and long-term investments.
