Volatility
Definition
A statistical measure of how much an asset's price fluctuates over time. Higher volatility means larger and more frequent price swings in both directions.
Volatility measures the degree of price variation over time. A stock that moves 1-2% daily has low volatility; one that swings 5-10% daily has high volatility. Bitcoin, which can move 5-10% in a single day, is considered highly volatile compared to large-cap stocks that typically move less than 1%.
Volatility is typically measured using standard deviation of returns. Historical volatility looks backward at actual price movements. Implied volatility (IV) looks forward, derived from options prices, and represents the market's expectation of future volatility. The VIX index measures implied volatility of S&P 500 options and is often called the "fear gauge."
Volatility is not the same as risk, though they're often conflated. Risk is the probability of permanent capital loss. Volatility is temporary price fluctuation. A volatile asset can be a great long-term investment (Bitcoin has been extremely volatile but has appreciated enormously). A low-volatility asset can still be risky (a bond from a company heading toward bankruptcy).
Understanding your tolerance for volatility is crucial for portfolio construction. If you can't stomach a 30% drawdown, a 100% stock portfolio will cause you to make poor decisions during downturns. Better to hold a 60/40 allocation you can stick with than a 100% equity allocation you'll panic out of.
Volatility creates opportunity for those with a plan. Higher volatility means better prices for buying during dips and larger gains during recoveries. It also makes dollar-cost averaging more effective, as the price variation creates more opportunities to buy at below-average prices.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Frequently Asked Questions
Is high volatility good or bad?
Neither — it depends on your perspective and time horizon. For long-term investors, volatility creates buying opportunities. For short-term traders, it creates risk. For retirees drawing down their portfolio, high volatility is problematic. Your reaction to volatility matters more than the volatility itself.
Why is crypto more volatile than stocks?
Crypto is more volatile due to: smaller market size, 24/7 trading, higher retail participation, less institutional stabilization, regulatory uncertainty, and the speculative nature of many tokens. As the market matures and institutional participation grows, volatility may decrease over time.