The crypto business market is rife with numerous investment vehicles with their corresponding risk level and return-on-investment (ROI) potential.
In this market, cryptocurrencies are among the highest-risk investments anyone can make, as seen in the volatility of their value.
Volatility is a crucial factor for determining the success or failure of all cryptocurrency trades.
As a rule of thumb, the higher the volatility of a crypto asset, the higher the potential to make a profit or loss in a trade.
Although this risk of high volatility is alluring to some, it is still one of the leading reasons that deter the average consumer or business from investing in cryptocurrencies.
As a business owner looking to use crypto, it’s crucial to understand what volatility means and how to control it as best you can.
- 1 Definition Of Volatility
- 2 Factors That Influence Crypto Volatility
- 3 Strategies To Protect You from High Volatility
- 3.1 Diversification
- 3.2 Active Management
- 3.3 Hedge Positions
- 3.4 Dollar-cost Averaging
- 3.5 Holding For Long-Term Benefits
- 3.6 Use Of Stop-loss Orders
- 4 Learning More About Crypto Volatility
- 5 Risk Management
- 6 Conclusion
Definition Of Volatility
In the financial industry, volatility is one of the most common metrics for assessing investment risk.
It is defined as a measure of the degree of variability in the price of a particular asset over time. There are two types of volatility, namely historical volatility and implied volatility.
Historical volatility is a numerical measure of prices from an asset’s historical price chart over a specific period. Implied volatility is the prediction of future asset price movement.
To determine the variability of an asset, we can look at the price range it has reached over a certain period.
Factors That Influence Crypto Volatility
For the most part, a good number of the factors that influence price volatility in mainstream business markets are also applicable to cryptocurrencies. These (and other factors) include:
Sentiments: News Developments And Speculations
Speculations and news affect both the mainstream and crypto markets, but they have a bigger impact on crypto markets because they have less trading activity and fewer institutional investors. This price swing births market volatility.
Presently, most price fluctuations of crypto assets are speculative since the average crypto investor buys and sells assets based on sentiment.
Even investors with a long-term interest in cryptocurrency mostly invest, hoping that the asset class will garner more acceptance in the future.
Limited Supply And Major Holdings
The effect of investors who hold onto significant amounts of the overall pool of digital assets available in the crypto-ecosystem has also impacted the volatility of cryptocurrencies. Unlike fiat money, some cryptocurrencies, like Bitcoin, have a limited supply.
For instance, the number of Bitcoins is limited to 21 million, while the number of Litecoins is capped at 84 million, and the number of Chainlinks is set at 1 billion.
Consequently, the market could change significantly when investors buy new assets or sell their existing holdings.
Additionally, because cryptocurrencies are digital assets, the laws of supply and demand alone determine their price.
The Absence Of A Centralized Controlling Agency
Cryptocurrencies, unlike fiat currency, stocks, or bonds, are by their very nature not regulated by any entity in the traditional sense.
These anonymous digital assets are in sharp contrast to other asset classes with some type of governing or controlling agency. And it’s this anonymity that draws in some investors while putting others off.
What’s more? A whole slew of financial professionals, such as brokers or financial advisors, do not have access to cryptocurrencies.
Without this pool of knowledgeable investors, the market is filled with less experienced investors who are more likely to make impulsive buys or sells based on the smallest swings in the market, further perpetuating price volatility.
Challenges In Evaluating Asset Value
Cryptocurrencies are gaining popularity globally, but they are not as widely used as traditional assets such as gold or stocks.
The intrinsic value that would enable cryptocurrencies to generate income like standard goods or services is likewise absent.
In addition, because cryptocurrencies are a relatively new asset, it is difficult for most investors to assess their worth using conventional valuation tools.
They also have a direct correlation between perceived value and worth when utilized as a store of value.
Because of this characteristic, they are extremely vulnerable to market trends and media sentiments, which can result in large price fluctuations.
Strategies To Protect You from High Volatility
Managing volatility has grown in importance as the cryptocurrency market continues to develop and garner more interest from investors.
Controlling volatility is essential for reducing risk and maximizing rewards. Some helpful strategies are:
Investors can lessen their exposure to the volatility of any particular asset by spreading their assets among various cryptocurrencies and blockchain projects. This can lessen the effect of market changes on the entire portfolio.
You can diversify your cryptocurrency portfolio via several means. Five of the most common strategies you can use include:
Diversify By Industry
The application of blockchain technology is impacting many industries.
You can expand your crypto portfolio into healthcare, supply chain, transportation, entertainment, climate change, real estate, private equity, and more.
There has been a rise in business entrepreneurs moving into the online slots and gambling space, and crypto casino platforms, like these, are booming.
With this option, you get to diversify a portfolio and have fun simultaneously, but remember that gambling shouldn’t be considered a means to make long-term gains.
Diversify By Coins And Tokens
The most obvious strategy to diversify your cryptocurrency holdings is to spread out your direct ownership of virtual currency.
You can choose from many types of crypto coins, including payment tokens, security tokens, utility tokens, governance tokens, basic attention tokens, gaming tokens, and non-fungible tokens (NFTs).
Diversify By Asset Class
The options for diversifying a cryptocurrency investor’s portfolio are numerous and span many different asset classes.
Investors can purchase the stock of businesses with a cryptocurrency focus or businesses with sizable cryptocurrency holdings.
Bonds that invest in digitally issued cryptocurrencies like Bitcoin or blockchain-based bonds may be available to investors.
Investors can purchase blockchain-based real estate tokens to get a piece of the world’s largest asset class.
Diversify By Investment Vehicle
If you’re concerned about the security of your portfolio, then you could consider splitting your crypto holdings across different investment vehicles and account types like digital wallets, taxable brokerage accounts, cryptocurrency IRAs, and decentralized financial products.
The 80/20 Rule
Invest 80% of your portfolio in popular cryptocurrencies like Bitcoin and Ethereum. Allocate a smaller portion to a few of the top 10 cryptocurrencies based on their market capitalization.
Other mid- and low-cap cryptos, which are riskier but have the potential for significantly bigger gains, can make up the remaining 20% of your portfolio.
Some cryptocurrency investors may opt to actively manage their portfolios, attempting to optimize profits and limit risk by balancing and employing trading strategies.
Some investors might hedge their positions in cryptocurrencies using futures contracts or other financial products, which can lessen the effects of market volatility.
Instead of investing a large sum of money at once, this involves investing a set amount at regular intervals.
As the investor is not reliant on the timing of their investment to determine their return, this can assist in leveling out the effects of volatility over time.
Holding For Long-Term Benefits
The daily price fluctuations shouldn’t be a source of worry or fear if you plan to stay in the Bitcoin market for the long term.
Making the proper predictions along the way will be simple if you can quickly assess whether the asset price movement is upward or downward.
Use Of Stop-loss Orders
With the help of these stop-loss orders, investors can specify the price at which their assets will be immediately sold in the event of a market decline.
Learning More About Crypto Volatility
Cryptocurrency trading is growing in importance and being embraced by more industries, even though some people see it as a temporary trend.
The most effective strategies for trading and investing to make money are outlined in cryptocurrency trading courses, which delve deeply into this burgeoning industry.
You can enroll in a variety of courses online. We recommend choosing the right one based on your skill level, cost, course reviews, and learning pace.
You can search for courses on online learning sites like Coursera, Udemy, LinkedIn Learning, and others.
Recognizing, evaluating, and controlling possible losses from cryptocurrency trading is known as “crypto risk management.”
It entails an all-encompassing plan that includes goal setting, defining risk tolerance, allocating capital, diversifying one’s portfolio, and using the right trading tactics and tools.
This approach promotes logical, focused decision-making and helps avoid irrational, emotional trading decisions.
Here are four steps you can follow to manage trading risks effectively:
- Determine the source of the risk (whether internal or external).
- Use quantitative or qualitative techniques to analyze each risk’s likelihood and potential effects.
- Use strategies like diversification or hedging to reduce risks beyond your comfort zone.
- Use tools like charts or portfolio trackers to monitor the success of your risk control methods and make any necessary adjustments.
Volatility is inescapable in cryptocurrency markets; however, its effects can be managed.
Shrewd investors can capitalize on crypto volatility to make successful trades by staying up-to-date on market trends, using proven trading strategies, diversifying their portfolios, adhering to their risk management plan, and, crucially, avoiding greed.
Understanding and controlling your risk appetite by exercising caution is crucial to managing volatility.