Volatility is an inherent part of every market. It may be found in the commodities market, forex, stock market, and cryptocurrency markets. The degree of volatility, however, differs across them. While the FX and commodities markets are moderately volatile, the stock and cryptocurrency markets are far more volatile. Volatility may signify various things in different contexts; for example, if you are invested in an asset and the price of your purchases is growing due to volatility, this is good news. Conversely, when volatility is unfavorable, and the value of your assets falls, you have a problem.
Especially in a market like cryptocurrencies, where there is high volatility. It has the potential to make you significant profits and at the same time incur losses. Unfortunately, cryptocurrencies are inherently risky. Scary, huh? Well, it doesn’t have to be. There are a few ways to keep volatility from taking big chunks off of your returns.
Why are cryptocurrencies so volatile?
It is critical to understand what causes cryptocurrencies to be so volatile since knowing the causes of their volatility is the first step in assisting you in managing it. The following are the reasons:
- Relatively New compared to Fiat Currency
Compared to conventional currencies, which have been around for a long time and are generally acknowledged, cryptocurrencies are still in their infancy. As a result, they have been unable to build solid assets such as bonds and equities. The unpredictability should fade with time, but for the time being, when you gamble with cryptocurrencies, you must ready yourself for whatever adjustments occur between the time you make your deposit and the time you withdraw.
- Negative News that causes Panic
Given that hardly everyone understands how cryptocurrencies function, any bad news about them tends to cause widespread fear. As a result, when there is news about how a particular coin is struggling or how specific organizations are pressuring the market, many people panic and sell their coins.
- Following the Crowd without the required knowledge
Many people who invest in cryptocurrencies do so because they do not want to miss out on current events. This is wonderful; however, if you do not follow up by obtaining the necessary information, you may simply be following the herd. As a result, if there is a huge sale or purchase of coins, they follow suit.
Ways to Cope-Up with Volatility in Crypto Markets
Stablecoins are the cryptocurrency market’s solution to volatility. Stablecoins are cryptocurrencies that maintain their value over time. They are often linked to a FIAT asset such as the USD or the CNY. They are used to enter and exit a market position on a more volatile asset, such as Bitcoin or Ethereum. Stablecoins provide a simple exit when you wish to close a crypto trade and temporarily shift into cash. Since 2017, stablecoins have grown in popularity to retain and store profits on trades without altogether abandoning cryptocurrencies.
Diversification is key to sustaining your investment journey. Therefore, it is something that every investor should be well versed in.
Fundamentally, you should diversify your assets in general among different investment vehicles with varying risk-to-reward ratios based on your risk tolerance. For example, you may have more high-risk – high return assets in your portfolio if you have a higher risk tolerance and vice versa.
When you make more bets with Bitcoin or another cryptocurrency, you ensure that the currency circulates more freely across society. As a result, more online gambling sites have begun to accept bitcoin as payment. As a result, the coins’ value will be maintained, and their volatility will be reduced. With time, your concerns about the instability will fade, and as you win more bets, you will be able to add more Bitcoin to your existing collection.
- Manage your emotions
Greed or FOMO (fear of missing out) and dread or Panic are the two feelings you should avoid. The key is to control your emotions. Set aims, goals, and guidelines to ensure that you trade and invest with structure.
Greed and FOMO occur when the market unexpectedly rises. More often than not, a drop will come following a day of trading in the green, leading you to believe you made the incorrect decision. This is the point when Panic and terror take over, forcing you to sell at a lower price than when you first joined the market. What occurred to you is something that every trader has experienced at some point in their career. You purchased high and sold low.
- Know when to HODL
Crypto prices correct more sharply than equities. These swings come suddenly. It’s almost as if you’re standing on the street enjoying the sunshine, and bam – a truck runs over you. However, if you ask a crypto investor if you should leave the investment if prices fall, they will tell you, “No, HODL!” HODL is an acronym that stands for “Hold On for Dear Life.” High levels of volatility in cryptocurrencies are neither a problem nor a feature. They are just a part of the ecosystem. When a cryptocurrency is experiencing a considerable fluctuation, staying on and being cool will save you money.