Historical Volatility vs Implied Volatility – What Crypto Traders Should Know

Volatility is a key concept in the world of cryptocurrency trading, influencing investment decisions and risk management strategies. 

But you might not know that you need to take into account historical volatility (HV) and implied volatility (IV) – two different metrics that provide useful but different insights.

Understanding the difference between these two types of volatility metrics is crucial for crypto traders, especially since volatility in crypto is much higher than in traditional finance.

Read below and explore the definitions of historical and implied volatility, their significance in crypto trading, and practical examples to illustrate their applications. 

What is Historical Volatility

Historical volatility refers to the measure of past price movements of a cryptocurrency over a specific period. It provides insights into the price fluctuations that have occurred in the past, helping traders assess the level of risk associated with a particular asset. 

HV is typically calculated using statistical methods such as standard deviation or variance based on historical price data. 

For example, if Bitcoin has experienced high price fluctuations over the past month, its historical volatility would be high, indicating greater price variability.

What is Implied Volatility

Implied volatility reflects the market's expectation of future price movements for a cryptocurrency. Unlike historical volatility that is based on past data, IV is derived from option prices and reflects investors' perceptions of future uncertainty. 

High implied volatility suggests that traders anticipate significant price swings in the future, while low IV indicates expectations of relatively stable prices. 

For instance, if the options market for Ethereum shows a surge in premiums, it implies heightened expectations of price volatility in the near term.

The Differences Between Historical and Implied Volatility

Here’s how the two differ:

Historical Volatility:

  • Historical volatility offers an understanding of past price swings in cryptocurrency assets. 
  • This metric derives from known price variations.
  • It doesn’t take into account market direction but focuses on the extent to which prices diverge from their average value within a set timeframe. 
  • It’s calculated as a percentage of the closing price, using the daily high-low range to gauge volatility. 
  • Historical volatility mirrors recent market turbulence.

Implied Volatility:

  • Implied volatility is a predictive tool employed by options traders to calculate probability.
  • It considers anticipated future volatility, as reflected in options premiums. 
  • The metric derives from the standard deviation of recent price changes, showing the market's outlook on forthcoming volatility. 
  • Unlike historical volatility, which relies on past data, implied volatility stems from option prices, indicating future volatility expectations. 
  • Since it pinpoints notable disparities in supply and demand, implied volatility forecasts an asset’s anticipated fluctuations within a defined period.

HV vs IV

Historical volatility

Implied volatility

Type of data analyzedAnalyzes past data of a crypto asset’s value within a set timeframeForecasts an asset’s fluctuations within a defined period
Timeframe focusFocuses on past price fluctuationsFocuses on future asset fluctuations
How it’s calculatedCalculated as a percentage of the closing price, it uses the daily high-low rangeCalculated using the standard deviation of recent price changes


Measuring Historical Volatility vs Measuring Implied Volatility

Information is within reach if you want to get a clear overview of a crypto asset’s historical volatility. You just have to check websites like CoinMarketCap, Trading View, and various crypto exchanges, which are well-versed in measuring historical volatility, often through chart analysis.

Additionally, technical indicators, like Bollinger bands, can help determine volatility levels.

Implied volatility for crypto assets can be measured using various methods and tools. Here are some key points to consider:

Option market data 

Implied volatility originates from the market price of an option contract, projecting an asset’s expected volatility within a specified timeframe. In crypto, only BTC and ETH have well-established option markets, allowing for precise determination of implied volatility.

Volatility indexes 

Certain platforms offer volatility indexes tailored for crypto assets. For instance, the Binance Volatility Index (BVOL) serves as a derivative financial instrument for gauging implied volatility within the cryptocurrency market. 

Another notable tool is T3Index, offering volatility indexes specifically for BTC and ETH, assessing anticipated 30-day implied volatility.

Why Both Historical and Implied Volatility are Important When Trading Crypto

Grasping the distinctions between implied and historical volatility empowers you to:

  • assess and compare how affordable or expensive options contracts are by analyzing their implied volatility against historical volatility;
  • develop a robust risk management strategy by evaluating potential price swings in the underlying crypto assets;
  • find potential trading prospects by identifying inconsistencies between implied and historical volatility.

Key Takeaways

Historical volatility offers a retrospective view of past price fluctuations in crypto assets, observable through price movements depicted on charts. 

Implied volatility is a tool for forecasting future price movements by analyzing the prevailing market conditions for options contracts.

While historical and implied volatility can provide useful insights, they shouldn’t be the sole basis for your investment decisions. Conduct thorough research and apply advanced technical and fundamental analysis to better understand the crypto market and crypto assets.