TL;DR
- The crypto market’s volatility is well-known, but its adoption has only increased in the past decade owing to its huge growth potential. So while volatility can prove risky, investing with a clear vision and analysis can help you leverage it.
- When investing in crypto, keep your emotions in check and rely purely on logic to avoid giving in to FOMO/FUD.
- Choose a strategy that works for you depending on your goals and risk appetite. Investment strategies like dollar-cost averaging can prove useful for beginners.
- Leverage asymmetrical upside using logic and analysis to limit your risk while maximizing your profit potential. Asymmetrical upside refers to sudden rises in crypto prices.
- Plan your entry and exit strategy, and always diversify your portfolio to minimize risk.
Introduction
“Volatility is often a symptom of risk but is not a risk in and of itself. Volatility obscures the future but does not necessarily determine the future.” – Peter Bernstein
This quote fits perfectly with the current situation of the cryptocurrency market. In the past decade, the crypto market has witnessed a surge, with more investors and traders weighing this asset heavily in their portfolios. If you ask why, the answer is its enormous returns.
The crypto market was pretty “steady” until 2017. The course changed in 2017 when the market soared by 1200% due to increasing interest in this digital asset. The upside was short-lived, and the market crashed in 2018. However, within four years, the crypto market valuation tripled to $3 trillion from $620 billion.
If you had invested during the 2018 crash, your investments would have grown generously until they stopped this year.
When investors execute their trades with emotion rather than logic, emotional exuberance leads to a market frenzy. With Luna (one of the top 10 cryptos) losing 99% of its valuation this year and macroeconomic concerns growing, the crypto market is again below a $1 trillion valuation.
Crypto Volatility: A Blessing in Disguise
Cryptocurrencies are digital assets based on encrypted algorithms to provide an alternative payment medium. Unlike centrally-owned currencies like Indian Rupee, US Dollar, Chinese Yuan, etc., cryptos are backed by blockchain, a decentralized, shared ledger.
Typical legal currency is backed by some sort of assets. For example, until 1971, USD was backed by gold, which is still an ongoing practice in India. However, this is not the case with Bitcoin and other cryptocurrencies, which results in higher volatility. They purely derive value from the fundamental problems they are solving, along with demand and supply. The lack of regulations works as a cherry on top!
The one reason that attracts investors to cryptos is its volatility itself. This is also the factor that fuels more volatility in this digital asset. Though the chances of a kite crashing after flying high are always more!
When you invest with a herd mindset, the probability of getting losses is high. Thus, while crypto volatility is risky, investing or trading with a clear vision and analysis can help leverage it. After all, volatility is not a risk, but how you use it is the risk.
How to Survive Crypto Market Volatility?
To survive amidst the volatility, how you translate the volatility is crucial. It is on you to make it your battle sword. Here are a few ways to survive and grow amidst crypto volatility.
1. Keep emotional impulses aside
Emotions are good until you have them under control. Investment is an art, and logic is the artist. Emotions, including greed, fear, excitement, etc., might make you put your money on a bet that is hollow in the first place.
Sometimes, so-called experts can also leverage your emotions against you. The Fear of Missing Out (FOMO) is one such weapon that can be used against you.
Imagine you investing in Bitcoin in November 2017 when it was at an all-time high. You were waiting for the right period and lost patience at the wrong time due to possible FOMO. The same investment tanked to the bottom by May 2018. Result? You’re losing money! Make it your first rule to keep your emotions at bay when money is involved.
2. Choose a suitable strategy
There is no meaning in trading blindly and putting money when you see any crypto rising without conducting due diligence and research. Start this journey by establishing a suitable investment/trading strategy for yourself. Also, decide your risk appetite, which can help you understand the risk-to-reward ratio. For example, for getting a return of 2X, are you willing to take a 3X risk? The risk-to-reward ratio for that would be 3X:2X.
Investing strategies such as dollar cost averaging is a starter for you to begin your journey. It eliminates the volatility angle. Via this strategy, you put money in crypto at regular intervals, and the cost of buying them averages with time.
3. Leverage asymmetrical upside with logic
Asymmetrical upside refers to sudden rises in crypto prices due to various reasons, including volatility. It leads to great profits with less risk–unlimited upside and limited downside. You can seize such opportunities, but it requires thorough fundamental and technical analysis. Many crypto platforms provide tools like Relative Strength Index (RSI) indicator, Coin Metrics, etc. They help traders/investors identify asymmetrical upsides with large data processing.
To identify such trends, you have to work with logic and do your research before entering the crypto market. Otherwise, it is more like speculation and thus may not work for a more prolonged phase. When you mix trading/investing with speculation, it triggers emotions, and emotions are an antidote to logic. The result is losses.
This does not mean you should not leverage upside potentials for your benefit, but you should march on this road with analysis to back it up.
4. Know when to hold and let go
Knowing when to hold on and let go of in the crypto market is essential. Market noise is likely to persist and can be a major cause of frequent fluctuations. The crypto crashes, or highs are more sudden than other assets like equity.
Thus, it is crucial to know when to hold on to your investments and when to sell them. Do not enter the market by being attracted to certain highs or exit it with lows.
5. Never put all your eggs in one basket
This is a rule that should go into your investment journey without any exceptions. Diversification is required to reduce the overall investment risk. This means do not put all your money in cryptos and also include that when you invest in the crypto market, do not chase single crypto–diversify.
If you had invested heavily in Luna last year, this year, you might have lost your entire investment amount. From $120 to $1 is not an ideal situation to be in. Thus, diversification is a crucial deal-breaker.
Like equity, cryptos also have many options to diversify the range of investments; crypto platforms also provide these options. For example, Mudrex’s Coin Sets lets you invest in a bundle of cryptos with small amounts. These bundles can be selected from a wide range of Coin Sets categorized based on their market cap, themes, and more.
Conclusion
Crypto investments, like any other investments, are subject to market risk. It is on you how to leverage it and survive the heavy toll of volatility. The cryptocurrency market runs 24 hours; thus, even the smallest of changes or news can have a massive impact on prices. Therefore, decide your risk appetite and trade with logic to weigh the end game on your side.
FAQs
1. What causes high volatility in crypto?
There are multiple factors that contribute to the volatility of the cryptocurrency market. Crypto is so volatile because it is not backed by any physical entity or an asset like fiat, gold, or silver (except stablecoins). The value of a coin is determined by demand-supply, availability in exchanges, people’s perception, and its fundamentals.
2. How is crypto volatility calculated?
The volatility of a cryptocurrency can be measured by calculating the percentage standard deviation of the current value with respect to the moving average of the last 30 days’ value. The standard deviation of a data is the square root of the variance of the data.
