Understanding and Coping with Volatility in the Cryptomarket

Understanding and Coping with Volatility in the Cryptomarket

Cryptocurrencies, especially Bitcoin, fluctuated heavily in March and overall displayed more bearishness than bullishness. Bitcoin jumped in value but then fell by the end of the day. Other major currencies were also a lot more bearish than bullish. Often the markets were closing with significant downward shifts in value.

When investing in cryptocurrencies, this kind of volatility is something you should expect. Below is a look at volatility so you can understand it better when dealing with Bitcoin volatility and that of other cryptocurrencies.

Why cryptocurrencies are volatile?

There are so many different factors contributing to the volatility of cryptocurrencies. Two main ones being that the market is still emerging, and technologies are still developing. The fact that these are digital assets, rather than currencies, also contributes to their volatility. This is because perceived value and real-time supply and demand dictate the price.

Media stories, some unfavorable, have an impact on prices, too. Investors follow the news closely for stories that will influence the market. Both negatively and positively. Unfortunately, some get their news from social media or less credible outlets and the information isn’t always reliable.

The pros and cons of volatility

Volatility isn't necessarily a bad thing for investors. If you’re investing in cryptocurrencies, you get the chance to see significant returns over time. Especially if you observe the long-term buy and hold strategy. If you’re more of a short-term investor in cryptocurrencies, you make a profit quickly by can taking advantage of price swings and predicting movements or trends in the market accurately.

This volatility can take a toll psychologically, however, if you are a short-term investor. The constantly changing price makes following the market highly demanding and predicting trends can be tiring.

All of this can seriously interfere with your emotional wellbeing, too. Sudden surges in value generate excitement and may get you rushing to invest purely to avoid missing out. Sudden drops in the value, meanwhile, will create panic and anxiety. Not to mention a few regrets that you did not sell your cryptocurrencies sooner.

Coping with volatility

Understanding and accepting that the market is volatile is a good starting point. This allows you to prepare for what is coming.

Experts suggest the “Hold on for dear life (HODL)” strategy, the long-term strategy of holding on to your cyber currencies for a long time before you sell them. This is so you avoid some of the emotional highs and lows that the short-term trading of cryptocurrencies will put you through. Fluctuations in price will not unsettle you.

An alternative strategy is to dollar-cost average. This involves setting up a schedule and investing the same amount over a fixed period. The strategy works best in volatile markets such as the Bitcoin one.

Additional strategies include diversifying your investments, rather than putting your eggs in the Bitcoin basket only. Also, do not invest more than you can afford to lose. If your cryptocurrency investments gain in value, you can rebalance your asset allocation and shield yourself from some of the volatility. This is a question of discipline as well.

Volatility is a natural part of life in the cryptocurrency market. But, if you employ the right strategies you can protect yourself and get the most out of your cryptocurrency investments.

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