Crypto is known for its volatile nature, and all the wild price swings seem to be the climax of an interesting movie – only that this movie never ends. Cryptocurrencies are the kind of thing that keeps you on the edge of your seat, wondering what will happen next in the market. And yet, many have criticized the industry harshly, reiterating that these digital assets are incredibly volatile and have no specific functionality. And crypto enthusiasts also agree on the volatility part – it’s enough to analyze Bitcoin’s price on the Binance exchange to understand the sudden changes in an asset’s value.
But does that make cryptocurrencies an impractical investment? Not necessarily. While it is often perceived as the enemy, volatility isn’t entirely bad. In fact, it’s an essential part of the crypto market, as it can equally bring massive gains to investors.
Volatility doesn’t equal risk
Essentially, volatility is a metric that measures the degree to which an asset value can go up and down in a specific amount of time. It can be an incredibly valuable tool, as it tells you a lot about the performance of an asset. While many investors see volatility as a barrier to investing in cryptocurrencies, equating it with risk, that’s not how things really are. Volatility is only a statistical measure; risk refers to the possibility that investments’ value could decline. Using the two interchangeably can cause investors to miss out on substantial upswings in price – all because of the fear of volatility. Now, that’s probably something you wouldn’t want.
What makes cryptocurrencies so volatile?
High price fluctuations are a normal occurrence in the crypto market, and there are many reasons behind the industry’s volatility, such as:
- The market is still relatively young. Most cryptocurrencies have only existed for less than half a decade, so they are still in their growth phase. In other words, it’s normal for the price of digital assets to fluctuate, given that they are a new concept in finance and the modern Internet. Until the market settles, establishing a fair value for cryptocurrencies, their prices will likely keep going up and down.
- There’s a dynamic supply and demand in the sector. The distribution of supply and demand also influences volatility, especially in the cryptocurrency market. Most digital assets have a limited maximum supply, which means that sudden demand increase boosts price, thus leading to volatility. The crypto market can absorb the shocks in supply and demand only if they become mature enough.
- Digital assets can be difficult to measure. While you can’t place traditional corporations in different categories such as manufacturing, utilities and so on, that’s not the case with cryptocurrencies. Because they are hybrid and their value is based on what they provide to people, it’s quite hard to measure crypto projects.
Why do investors fear volatility, and is there something to do about it?
The fear of volatility is somewhat understandable, given that it is in humans’ nature to avoid risk as much as possible. In ancient times, you had no other option but to run from a potential threat – otherwise, a tiger could have eaten you. The good news is that society has evolved since then, and humans no longer live in the wild! While the risks present in the modern world can indeed feel scary, most of them don’t threaten your safety (except if you text while driving, which is banned in many states anyway).
Most people consider risk to be something bad (it’s in your ancient biological makeup, so you can’t really help it). When it comes to investing, it’s easy to understand why many people are risk-averse – after all, their money is at stake. But sometimes, the fear is exaggerated and does no good apart from keeping you stuck. It only paralyzes you to take no action at all, and due to this fear that your investment could go down, you forget that there’s also a possibility for it to go up.
People fear what they can’t control, which also applies to volatility. However, there’s something that investors can do about volatility: measure it and then create a plan on how to deal with it. There are several ways to prepare for the volatility in the crypto market, and not all of them require advanced calculations. For instance, you can use indicators to help you make informed trading decisions. Simply put, indicators allow you to predict future price movements through graphs and equations, thus providing a better picture to help you figure out what to do next.
Now, it’s important to remember that these indicators don’t guarantee the exact price change of an asset, meaning it’s not possible to measure risk entirely. There’s still a certain degree of uncertainty, so it’s essential to approach cryptocurrencies correctly. That means not becoming a victim of FUD or FOMO and diversifying your portfolio, among other things. The crypto market is incredibly volatile during FUD and FOMO, and beginner investors don’t quite understand what causes volatility in the industry, so they end up making bad trades. This is why it is crucial to learn about cryptocurrencies and understand all the risks involved before investing in them.
Diversifying your portfolio is equally important when it comes to withstanding the market’s volatility. You’ve probably heard before that it’s not wise to ‘put all your eggs into one basket’. In other words, you should spread your holdings among several assets. As a rule of thumb, you should put only 10% of your funds in a specific asset. Spreading your investment means you aren’t overexposed, so if an asset’s price decreases, you’re still safe.
Crypto volatility: not inherently bad, but definitely not for everyone
Before investing in cryptocurrency, it is imperative to take the time to understand volatility and how it works. People don’t have the same level of risk tolerance: for example, it’s improbable for a 52-year-old retiree to have a risk tolerance as high as a graduate who seeks to preserve wealth. This means that a younger individual is more likely to consider cryptocurrencies (and that’s what statistics suggest, too, as most Bitcoin buyers are 15-34 years old).
Even though volatility isn’t necessarily a bad thing, cryptocurrencies are not suitable for everyone. Some people may simply not be able to face such risks, which is totally fine. However, if you want to put your earnings into crypto, make sure to measure volatility and hone your investing skills for a positive experience in the market.