- Investors use Volatility Indexes to predict the health of the market and choose between buying or selling.
- S&P 500 is one of the most popular stock market indexes by CBOE.
- The Bitcoin Volatility Index predicts the future volatility of Bitcoin over the next 30 days.
What is the Volatility Index?
The Chicago Board Options Exchange (CBOE) first implied the volatility index in the early 1990s. Price Volatility means measuring the fluctuations in the price of an asset or stock. The volatility of markets and stocks often comes into the picture when an external event creates uncertainty and is allied with fear most of the time which can happen during market crashes or other downward moves. Volatility is measured through standard deviation. However, it only represents the measurement of the swing and not its direction.
The CBOE measures volatility using the S&P 500 index, which represents the top 500 publicly traded companies in the US. They have the highest market capitalization. These include Apple Inc, Microsoft Corporation, Alphabet, Berkshire Hathaway, and Johnson & Johnson.
Companies that have more market cap have more weight in the index and their performance is often looked upon by investors as a measure of the health of the whole stock market and even the US economy. This S&P covers a huge chunk of the market. Investors often use it as a standard to compare their portfolio’s performance.
The volatility index helps investors and traders understand the mood of the market and with experience they can make decisions on either buying or selling the stock. VIX, however, only provides a theoretical prediction and not the actual volatility of the market.
Although S&P 500 is the most popular index used to judge the market health, there are several other popular indices as well.
- Dow Jones Industrial Average
One of the oldest stock market indexes, named after their founders Charles Dow and Edward Jones, it takes into account the top 30 public, blue-chip companies listed on the NYSE and Nasdaq. Many investors associate a strong Dow with a strong economy and a weak Dow with a weak economy.
Presently, it includes companies like Nike, McDonalds, Boeing, and Chevron among others.
- Nasdaq Composite
Nasdaq Composite Index includes almost all the stocks which are listed on the Nasdaq stock exchange. It does not target only the major companies in the stock and depicts the entire Nasdaq market.
Bitcoin Volatility Index
On similar notes discussed previously, the Bitcoin Volatility Index measures the volatility in the price of Bitcoin and predicts it for the coming 30 days. This volatility index is the first to be implied for a digital asset. This index is maintained by Crypto Compare, which relies on the options data by Deribit.
Bitcoin is presently the largest and most popular cryptocurrency and its volatility depends on several factors.
The most prominent is the supply and demand for the tokens. We know that Bitcoins have a limited supply and the closer the number of coins in circulation reaches this limit, the higher the price will be. The whale accounts, which have a huge number of Bitcoins with them, also significantly affect the price.
As Bitcoin became popular in a generation with social media and Gen Zs, who spend considerable amounts of time maintaining their social image, Bitcoin’s price also fluctuated with its hype.