Implied volatility represents the market’s expectation of a digital asset’s future price movement. This forward-looking metric is derived from the current prices of options contracts on a cryptocurrency, reflecting the market’s consensus forecast for the underlying asset’s price variability over a specific future period. It is not directly observed but calculated by working backward from option prices using a pricing model. High implied volatility suggests market participants anticipate significant price swings, while low implied volatility indicates expectations of relative stability. This measure is a key indicator of market sentiment and perceived risk.
Context
Crypto news often reports on implied volatility when discussing the pricing of options contracts or gauging overall market sentiment regarding future price uncertainty. A significant debate involves the accuracy of implied volatility as a predictor, especially in the rapidly evolving digital asset markets. Tracking changes in implied volatility provides crucial context for understanding market participants’ collective outlook on potential future price action and risk.
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