Definition ∞ 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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