Moon or markdown: A guide to accounting for crypto volatility

Of all cryptocurrency’s traits, predictability isn’t one of them. Volatility – marked by constant ups and downs – is one of the defining features of digital assets. Even the most established coins, like Bitcoin (BTC) and Ethereum (ETH), typically show significant price volatility compared to traditional assets like stocks or gold.

While volatility gives traders and investors more growth potential, it also creates unique risks – especially for businesses holding crypto on their balance sheets.

Accounting for crypto volatility can be tricky, but strategies exist to make it easier. In this guide, we’ll explain cryptocurrency volatility and how to navigate it.

What’s volatility in finance? 

In financial markets, volatility measures how far and fast an asset’s price moves on average. Greater price volatility means wider fluctuations from moment to moment, while low-volatility assets tend to stay within a tighter, more predictable trading range.

Because highly volatile assets experience larger and faster price swings, they carry a greater risk-to-return profile. They offer more potential upside, but they also have a higher chance of significant losses if trades don’t work out. To better assess this risk, investors often review an asset’s historical volatility to see whether it fits their investment preferences and how much they want to allocate. Average volatility readings can also help short-term traders anticipate potential price movements and time their entry and exit points more precisely.

What does high volatility mean? Explaining volatility measurements 

Investors can study an asset’s historical price chart across different timeframes to get a general sense of its average volatility. However, for a more detailed understanding of price fluctuations, they often turn to technical tools and formulas designed to measure volatility more accurately.

• Historical volatility (HV): This metric measures the percentage variance from the price mean (standard deviation) to show the range of an asset’s price over a set period. Higher HV readings suggest broader, less predictable price swings.
• Implied volatility (IV): This measure draws from derivatives data, such as options contracts, to reflect current market expectations for price movement. The wider the variation in contract strike prices, the greater the IV and the higher the odds of extreme fluctuations.
• Average true range (ATR): This indicator measures price volatility in dollar terms rather than percentages and accounts for price gaps between trading sessions, typically over 14 days. Compared to HV and IV, ATR is especially popular among traders for setting price targets or limit orders.
• Beta: This metric compares an asset’s volatility to a benchmark like the S&P 500. A beta greater than one indicates higher volatility relative to the benchmark, while a beta below one suggests greater stability. 

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Why is cryptocurrency so volatile?

While digital assets like Bitcoin are often considered a store of value and occasionally show less volatility than indexes such as the S&P 500, cryptocurrencies as a whole tend to experience far greater price swings – especially among smaller, speculative altcoins.

Several factors contribute to this heightened volatility:

Market immaturity

Cryptocurrencies are much younger than traditional financial instruments. Even with rising institutional adoption and products like Bitcoin spot ETFs, the crypto market’s relatively short history leaves it with a limited track record, making it harder for investors to assess long-term risks and fueling greater uncertainty.

Lack of regulatory clarity

Despite efforts to establish global regulatory standards for digital assets, cryptocurrency laws still vary widely between nations. Conflicting policies, combined with anticipation around new regulations, add uncertainty to the cryptocurrency market and keep investors on edge, sometimes causing sudden, volatile price swings.

Lower liquidity

Liquidity refers to how easily investors can buy or sell an asset without significantly affecting its market price. In general, cryptocurrencies have lower average trading volumes than traditional assets and, therefore, lower liquidity. This contributes to a more volatile market that fluctuates sharply and experiences less predictable price swings.

Sentiment

Hype and hysteria aren't easy to quantify, but they heavily influence traders' behavior in volatile cryptocurrency markets. News headlines, social media trends, and influencer opinions often spark volatility by triggering emotional reactions, whether Fear of Missing Out (FOMO) or Fear, Uncertainty, and Doubt (FUD).

Technological issues

Blockchain technology has existed only as long as Bitcoin. While innovations in peer-to-peer (P2P) systems show great promise, they also introduce new vulnerabilities – some of which developers don't fully understand until after major exploits occur. These incidents, along with crypto’s short history, have also shaken investor confidence and increased the overall market volatility.

How volatility affects crypto accounting

As crypto gains mainstream acceptance, businesses are increasingly investing in digital assets or incorporating them into their operations. As adding Bitcoin to business balance sheets becomes more common, companies are encountering new accounting challenges caused by crypto’s volatile nature. Fortunately, software like CoinTracker – and working with a crypto-savvy CPA – can help businesses make sense of their crypto holdings and navigate common reporting challenges.

GAAP vs. IFRS reporting

How businesses account for cryptocurrencies differs significantly depending on whether they follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

For example, under GAAP’s Accounting Standards Codification (ASC) 350-60, it’s possible for businesses to use fair market value (FMV) to account for certain cryptocurrencies like Bitcoin and Ethereum. However, IFRS offers more flexibility, allowing businesses to classify crypto as either inventory or a financial asset depending on the circumstances. 

The disparity between GAAP and IFRS creates challenges for businesses, especially multinational companies, where the same crypto asset might be valued differently across parallel financial statements.

Revenue recognition for crypto payments

When a business accepts crypto as payment, it must keep meticulous records of the FMV at the time of each receipt. Because crypto prices can fluctuate drastically within minutes, even short recording delays can lead to discrepancies in revenue reporting and cost basis calculations. Without software integrations like CoinTracker for accurate time-stamping, it's easy for businesses to miscalculate reported income, gains, or losses. 

Optimize your crypto accounting system with CoinTracker 

Accounting for crypto assets can get complicated fast. Between fluctuating prices, detailed recordkeeping, and evolving tax rules, managing digital assets takes more than a spreadsheet. Fortunately, CoinTracker Enterprise simplifies the entire process. 

CoinTracker gives you all the tools you need to track your business’s digital asset holdings, organize them into detailed subledgers, and automatically sync data from exchange API keys and public wallet addresses. All your crypto activity is consolidated in one secure dashboard, making it easy to stay organized and compliant. CoinTracker also generates IRS-compliant forms, ready for your CPA or platforms like TurboTax.

Learn how CoinTracker Enterprise can streamline your crypto accounting – schedule a demo today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.