Whether you are a beginner or a seasoned investor, you have surely heard about the volatility of cryptocurrencies. This volatility makes cryptocurrency prices fluctuate tremendously, and prices can change even within a few minutes. Volatility is a double-edged sword, as it can result in both opportunities and risks. This is why it is essential to learn how to buy cryptocurrency and research better strategies to stay smarter and make cryptocurrency volatility work in your favor.
There are tools to better help you with managing volatility like the fear and greed index, which helps in reducing the chances of reacting with your emotions.
Understanding the best way to handle volatility will open the door to more strategic decisions and greater advantages. As crypto volatility can feel like a rollercoaster, it is essential to protect investments, which we will explore in this article. Keep reading.
What factors are driving crypto volatility?
There are plenty of factors that can impact the crypto volatility. The first step in developing better strategies is to understand the factors behind them. Here are some of them.
Market maturity
Shares and bonds have been around for many years, leading many investors to consider them. However, this can’t be said of cryptocurrencies, which emerged in 2009 with the launch of Bitcoin. This means the crypto market is still in an incipient phase. It is normal for assets to experience greater volatility in the early stages, which is why you see prices fluctuating on crypto charts.
Lack of regulations
Another factor driving significant volatility in the crypto market is the lack of regulation. Compared with the past, the crypto space has become more regulated, but not to the extent we have been used to with other assets. And this kind of unregulated market is making cryptocurrency highly volatile. Now, there are attempts to introduce more regulations to the crypto market, which might help keep its volatility under better control.
Whale investors
Whale investors can also create even more volatility in the crypto space. Whales are the ones holding large amounts of cryptocurrency. Because of this, they affect the market when they buy and sell, causing significant shifts in cryptocurrency prices and creating more volatility.
Tech improvements
Now, there are plenty of emerging cryptocurrencies on the market, and each is trying to solve the problems others have faced. Technology is evolving rapidly, opening the door to new crypto features and more frequent upgrades. These developments can also affect investor sentiment and lead to even more price fluctuations.
Emotions
People's emotions also attract volatility. The main feelings met when trading crypto are fear and greed. Fear manifests as the fear of missing out (FOMO). Because cryptocurrencies can yield massive profits, people want to take advantage of them. However, emotional investing can also lead to disadvantages and increase volatility. Fear and greed can lead investors to take exaggerated positions in buying and selling, which is why it is always better to be rational.
The best strategies to protect against volatility
There are certain strategies that can help protect against volatility in the crypto space. Here are some of them:
Diversify portfolios
Do you know the saying that you shouldn’t put all your eggs in one basket? This is relevant in the crypto market as well, as diversification will help you better mitigate cryptocurrency volatility. A portfolio's diversification means considering more assets, including crypto, bonds, and stocks, and spreading the portfolio across a wider range of digital assets. So, the ideal result is a combination of Bitcoin and altcoins such as Ethereum, Solana, Cardano, or XRP.
Research the market
Crypto investments are complex, and you should always research before adding any to your portfolio. If you know the features of cryptocurrencies before, you can make better strategies and invest in the digital assets that are in accordance with your needs and preferences. With research, you can draw the line between projects that only have short hype and those suitable for long-term approaches. Here are the main parts to take into consideration:
The use cases
Community activities
Whitepapers
The team
The problems it tries to solve
Develop a risk management plan
When considering cryptocurrencies, it is essential to develop a risk management plan to help you better navigate their volatility. Here are the best ways to manage the volatility of crypto:
Use stop-loss orders
Consider a maximum loss per trade.
Don’t forget about take-profit orders.
Monitor the specificities of projects, such as technical risks and legal developments.
Use dollar cost-averaging (DCA)
If you want a steadier investment that better protects you against volatility, it is also essential to consider investing smaller, fixed amounts rather than putting all your money in at once. In this way, you can reduce the risk of short-term volatility while identifying the best entry point into the market, so you can make more profits.
Consider tools that track volatility
If you already have some experience with investing, you can also consider some tools that can track volatility. In this way, you can better anticipate moves and identify more trading patterns. Here are some tools that will help with volatility.
Moving Averages (MA)
Relative Strength Index (RSI)
Bollinger Bands
Volume Analysis
Fibonacci Retracement
Can you escape volatility?
Volatility is an integral part of cryptocurrencies, so you will always deal with some volatility. But you can be smarter and consider some ways in which you can reduce the impact that volatility has on you. Plus, if you know how to deal with it, you can also consider volatility to work to your advantage and open the doors to rapid gains. But you also need to recognize the risks and be aware of them if you don’t want to lose your funds.
Volatility is present in crypto, so you won’t be able to escape it completely, but you can be smarter with your approach and learn the best ways to work with it. In this way, even though the others are comparing volatility with a rollercoaster, you can think of it as the best way to generate more profits.