The allure of high returns is no secret in the world of cryptocurrency, and this attraction continues to fuel the creation of numerous cryptocurrencies. Presently, there are over 23,000 cryptocurrencies available, offering investors thousands of avenues to explore when considering crypto investments.
While all assets face volatility, crypto’s volatility is on another level. Therefore, there is a need to understand how this volatility works and how investors can mitigate its effects and cushion themselves against it.
What is volatility?
In finance, volatility refers to the degree and rapidity of price fluctuations within a defined timeframe. It’s quantified through various methods, such as computing the standard deviation of returns over a period, employing beta coefficients, or utilizing pricing models.
Cryptocurrency is a high-risk, high-reward asset, and calculating volatility helps to assess if investing in a cryptocurrency will have negative or positive outcomes.
Causes of Crypto Volatility
Fiat currency typically derives its value from government backing or assets like gold, providing a degree of stability. However, cryptocurrency lacks such backing, rendering it susceptible to various influencing factors and potential volatility. Some of these factors are:
Supply and demand
Supply and demand significantly affect the value of a cryptocurrency. Simply put, when there is high demand for a cryptocurrency (resulting in it being bought in large numbers) the higher its value will be. Conversely, if the same cryptocurrency is sold more increasing its supply, its value will likely reduce. This supply and demand is determined by several factors including world news, government regulations, and views from crypto whales.
Competition
The cryptocurrency market is extremely competitive, with thousands of digital assets competing for attention, each with its own set of features. This competitive environment frequently impacts the values of these assets.
For example, when a cryptocurrency launches or introduces features that alter transaction fees, processing times, or transaction speeds, the values of other cryptocurrencies may fluctuate as investors review their holdings or preferences in response to these changes. The crypto ecosystem’s interconnection frequently leads to price changes across several assets in response to developments in one.
Market sentiment
Market sentiment in cryptocurrency refers to the collective attitude of investors towards a particular crypto at a given time. Experts agree that market sentiment is largely influenced by fear or greed.
Positive information about a cryptocurrency, be it from the world markets or from celebrity endorsements can trigger a bullish sentiment and increase prices. On the other hand, any negative news about the same crypto can create fear in investors and result in a bearish sentiment.
One tool that investors use to analyze market investment is the Crypto Fear and Greed Index, which leverages social signals and overall market sentiment using major cryptocurrencies like Bitcoin. The index picks multiple sources for its analysis and is divided into four main categories; extreme fear (orange), fear (amber/yellow), greed (light green), and extreme greed (green).
This tool provides vital market insights, assisting investors in making educated trading decisions. However, despite its value, it is not flawless and should be supplemented with additional tools and studies for a more holistic decision-making strategy.
Change in management
Similar to the stock market, a change in blockchain developers or founders can impact the crypto’s value, especially during the launch or when the digital currency is in its initial development stages.
Quarterly results
While most are not in the habit of doing so, more established cryptocurrencies publish quarterly or yearly reports to inform their investors of how the crypto is doing. Volatility can be triggered before, during, or after the results are published, determining what strategies investors will use going forward.
How to beat crypto volatility
Volatility, while difficult, provides an opportunity for those who can properly grasp and evaluate it. Traders can anticipate prospective trends and tactically manage the market by understanding the dynamics of price changes and market movements.
Define your strategy
Having a well-defined trading strategy is crucial before entering the market. It enables you to gauge your risk tolerance, outline both short and long-term goals, determine your preferred timeline, and identify optimal moments for buying or selling.
It’s vital to ensure you’re comfortable operating within the volatility of the market when establishing your strategy. This helps in making informed and measured trading decisions aligned with your objectives.
Do not rely on your emotions
Crypto trading based on emotions can be detrimental. Emotions like fear or greed can force you to make a move that has no merit. The fear of missing out (FOMO) can be used by crypto developers and marketers to make you believe now is the time to invest in a specific cryptocurrency.
Diversification
Like with other financial assets, diversifying your portfolio is a great way to manage risk. Investing in multiple cryptocurrencies is a way to spread your risk. This means that a price drop in one crypto does not negatively impact your entire portfolio.
However, do not invest all your money in cryptocurrencies alone as a negative trend in a major crypto can affect the whole market.
Leverage stop-loss orders
A stop-loss order is an order placed to automatically buy or sell a specific cryptocurrency when it reaches a certain price. This is done to minimize loss in case the price falls. Using stop orders is a great way to avoid emotional investing as the trader uses a predetermined buying or selling price based on research.
Know when to hold
Learn when to listen to market noise and when to sell. Sometimes you may just need to hold on for dear life (HOLD) and ride the wave. It may be too early to make a decision and you should not let panic inform your decisions.
Apply Dollar-Cost Averaging (DCA)
Dollar Cost Averaging involves investing in a cryptocurrency at regular intervals using a set amount of money. This strategy is designed to work whether markets are thriving or not and is used to cushion investors, particularly long-term investors from the impact of short-term fluctuations.
Keep yourself updated
Staying abreast of the latest market trends is crucial. Following seasoned crypto experts and thoroughly evaluating all information received before making trading decisions is a wise approach. It enables you to gather insights, consider diverse viewpoints, and make informed choices based on a comprehensive understanding of the market dynamics. This diligence helps in mitigating risks and making more strategic trading decisions.
Final Thoughts
Always evaluate a cryptocurrency before investing. Check out the project’s website, read the white paper, and scrutinize all the information passed through various channels. Above all, analyze the crypto’s market metrics. When you do your due diligence, though challenging, it is much easier to buckle down and ride the wave when the crypto faces volatility.
Disclaimer: Investing can be quite a wild ride – especially when you don’t know the terrain! To keep things from getting too rocky, take some time beforehand to get familiar with all of the risks involved. Our site is here to up your investor game by providing all available intel about platforms and trends, but we don’t take responsibility nor can we be held accountable as advisors. That being said, it’s still important for you to make educated decisions that match what works best for YOU – just remember: no amount of savvy will guarantee success or protect against loss so invest money you can spare.
