What is Volatility?

Volatility describes when a market, security or currency fluctuates in value. For example, fiat currency, such as the US dollar, remains relatively stable over time. In contrast, the values of many cryptocurrencies change every minute of every day.

Volatility in finance describes when a market, security or currency (fiat or cryptocurrency) experience fluctuations in value. These fluctuations could involve both sharply rising or sharply falling values over some period of time.

Unlike with a fiat currency such as the US dollar, which remains relatively stable over time, the value of most cryptocurrencies constantly changes. In fact, relative to a given fiat currency, the values of many cryptocurrencies change every minute of every hour of every day. Akin to the stock market, the value of most cryptocurrency is driven by buyer demand and seller availability. But unlike the Monday through Friday schedule of most stock markets, the cryptocurrency exchanges where buyers meet sellers are open for business 24/7.

Cryptocurrency volatility is relevant to enterprises and other businesses that must hold cryptocurrency long enough to cover their blockchain expenses. These expenses can vary from compensating employees with cryptocurrency to something as simple as paying the coin-operated fees that are necessary to use a distributed ledger’s services. Either way, as long as an organization must keep some amount of cryptocurrency in its reserves, that cryptocurrency is subject to volatility relative to whatever fiat currency the organization generally uses for its daily operations. This volatility can work in the organization’s favor, or against it.

If a cryptocurrency goes up in value during the period of time that an organization is holding that cryptocurrency in its reserves, then the organization can potentially benefit from a financial gain should it choose to exchange that cryptocurrency for fiat. But, depending on which distributed ledger that an organization is using for its blockchain initiatives, those same rising valuations may also result in an increase in the coin-operated fees (measured in fiat equivalent) for using that ledger.

On the flipside, any devaluation of a cryptocurrency that an organization is holding in reserve could result in a loss should the organization decide to exchange it for fiat. Correspondingly, a drop in cost of a cryptocurrency may also result in a drop in the coin-operated fees for using its associated ledger.