As a newbie to cryptocurrency investing, the wild price swings can be a nerve-wracking ride. You’ve probably seen major crashes followed by huge rebounds in coin prices. This wild volatility is typical in the crypto world.
While experienced investors have learned to stomach the turbulence, as a beginner, it’s understandable to feel uneasy during intense ups and downs. In this article, we aim to arm you with the right strategies to manage uncertainty and risk effectively.
From using a secure exchange to dealing with the Fear of Missing Out (FOMO), we look at how to manage the instability of the crypto market.
Let’s delve in!
Understanding Crypto Volatility
Cryptocurrency is known for its extreme volatility— meaning prices can change rapidly and dramatically. In recent years, major coins like Bitcoin and Ethereum spiked in value only to plunge 50% a few days later. These quick price movements make cryptocurrency both profitable and highly risky. Other assets like stocks and real estate see steadier and gradual price movements.
A wide range of factors causes the volatility of the cryptocurrency market. When you understand these factors, you can then make more informed decisions during periods of price fluctuations. Some of these factors include:
Speculation
Unlike stocks, crypto prices are not based on company fundamentals. Instead, people buy and sell coins based on hype, rumors, or emotions rather than rational analysis. This speculative trading increases volatility.
New Asset Class
Cryptocurrency is still establishing its value and place in finance. There is no underlying framework to anchor prices. As a new asset class, it experiences wild price swings as the market seeks equilibrium. The value rollercoaster will smoothen over time as crypto matures.
Supply Caps
Many cryptocurrencies have a fixed or limited supply of coins/tokens. For example, Bitcoin has a supply cap of 21 million, with only 19.2 million in circulation as of the time of writing. Due to this finite availability, small changes in demand get amplified and create significant price reactions. When demand rises quickly, prices skyrocket due to supply caps restricting the increase.
Regulatory Changes
Government policies and regulations also have a significant impact on the crypto market. Now and then, new rules are established, and they tend to shake investors’ confidence, causing prices to drop. While crypto is a decentralized asset under the control of no government body, its value can still be impacted by government policies.
One notable example of government policy affecting the price of crypto was in September 2017. China banned initial coin offerings (ICOs) and ordered the closure of cryptocurrency exchanges operating within its borders. This regulatory crackdown led to a significant sell-off in the cryptocurrency market, with prices of major cryptos like Bitcoin and Ethereum experiencing sharp declines. Additionally, the lack of clear regulations also breeds uncertainty amongst investors.
Security Issues
When there are hacks, thefts, and technical problems with crypto exchanges or projects, there tends to be a crash in coin values. When there is a breach in security, there is often panic selling as well.
How to Hedge Against Crypto Instability
Now that you’ve understood the factors that cause price changes let’s look at some practical strategies to tackle this instability.
Diversify Beyond Crypto
When investing, don’t put all your eggs in one basket. While cryptocurrency offers tremendous potential, it is a speculative asset class and a high-risk investment. Balance crypto with other assets like stocks, bonds, real estate, etc.
Diversification reduces risk because various unrelated assets won’t all drop simultaneously. Ensure that you build your portfolio based on your risk tolerance. Having a balanced investing foundation will help you weather crypto’s storms.
Make Decisions with Your Head, Not Just Emotions
When getting started with crypto, one of the first lessons you are taught is the psychology of trading and how to control your emotions.
When coins are pumping, it’s tempting to give in to FOMO (fear of missing out) and buy at the peak. The euphoria evaporates quickly when things turn bearish (falling). Conversely, seeing red candles triggers frantic selling, but that’s often the worst time to exit.
Make rational moves that align with your long-term strategy, not knee-jerk reactions to the market movement. Ensure you set investment policy rules on when to buy, sell, or hold— and stick to them, regardless of market mania. When emotion is out, you take a step towards surviving turbulence.
Only Invest What You’re Willing to Lose
As a beginner, it’s crucial only to invest funds that won’t be needed in the near future. Sometimes, be prepared to hold for multiple years as crypto rewards patience. Most importantly, have a
cash buffer for emergencies and living expenses before putting excess into crypto. Be willing to lose what you put in— but research coins diligently to minimize that risk.
Dollar Cost Average to Smooth Volatility
The crypto market can be sensitive to demand and supply, so investing a large amount at once can influence price change. As a new investor, it is advised to practice Dollar cost averaging to smooth volatility. This strategy means steadily buying at set intervals, like 100 AUD per week. Buy more coins when prices drop and fewer when they rise.
Keep Learning About Crypto Fundamentals
Knowledge is power when navigating choppy waters. Ensure you continue to learn about the basics of crypto, from major projects to market cycles. You can also use exchanges with learning resources such as Independent Reserve. You’d also find podcasts and crypto news helpful on this journey.
Crypto Rewards Patience
Patience is the ultimate virtue in crypto investing. Consistently apply proven strategies around diversification, rational decision-making, prudent investing, and continuous learning.
As we’ve explored, cryptocurrency has undeniable long-term potential and intense volatility. Prices soar and plunge, often dramatically. It’s a rollercoaster indeed! Yet crashes inevitably give way to recoveries. With the proper perspective and tools, you will ride out volatility waves and reach the shores of success. Crypto rewards those with knowledge, discipline, and, most importantly, patience.
