First things first, let’s simplify the meaning of the overused word, Volatility.
In simple language, it is the extent to which an asset’s price can fluctuate over time in either direction.
Volatility is unavoidable in any market. It exists in the commodity market, forex, stock, and cryptocurrency as well. However, the degree of volatility varies in each of them. While forex and commodity markets are mildly volatile, the stock and cryptocurrency markets have greater volatility.
Volatility can mean different in different situations; When you are invested in an asset, and because of volatility, your holdings’ price is rising, then it is good news for you. When volatility is unfavourable, and your assets’ value decreases, it is a problem for you.
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.
3 Ways to Cope-Up with Volatility in Crypto Markets
While volatility is part and parcel of the cryptocurrency market and can’t be avoided, you should make an effort not to let it affect you too negatively.
Here are a few things you can do to curb volatility:
Diversification is key to sustaining your investment journey. It is something that every investor should be well versed in.
Primarily, you should diversify your investments in general into multiple investment vehicles with varying risks to return ratio as per your risk appetite. If you have a greater risk tolerance, you can have more high risk – high reward assets in your portfolio and vice versa.
Considering cryptocurrencies are high-risk, high reward assets, you should allocate a certain %age of your total investments to cryptocurrencies.
Once this primary diversification is done, you can then diversify within asset classes.
Let’s say you have 20% of your portfolio invested in cryptocurrencies. Now what you can do is, you can further diversify and allocate funds from this 20% to varying cryptocurrencies to reduce the impact of volatility even more.
Out of this 20%, you can then proportionately invest in established or new cryptocurrencies. Generally, people who want to experience less volatility go for more established cryptocurrencies and vice versa.
2. Long Term Investment
Going long term with your investments, in general, is the way to beat volatility.
Investing for more extended time frames, say 5years or 10years, while being consistent helps you curb the negative impact of volatility and thus have a greater chance at making reasonable profits.
E.g., Let’s say you had invested ₹10000 in Bitcoin in 2015, Today you would have had ₹ 3,50,000, and that will only be because you would have upheld your investments for 5yrs without cashing out, fearing the downtrends that happened over the course.
Similarly, had you not stuck through your investments and cashed out in 2018, which is known to be the year when Bitcoin experienced severe downturns. You would not have made so much profit and had also incurred some losses because of the downtrend.
Every market goes through phases, but if your investments truly hold potential, then they will surely pay off in the long run.
3. Stablecoins Are an Option
Stablecoins are an open secret of the crypto world.
They are basically cryptocurrencies with no volatility and thus a perfect way to balance the volatile cryptocurrencies.
Stablecoins are cryptocurrencies that derive their values from external assets like fiat or any other commodity. Since the pegged assets experience negligible volatility, stablecoins also experience little to no volatility.
They are convenient for investors who like to step in and out of the market often (Traders) to realize instant profits. It is also ideal for investors who can’t withstand the steeping market. When the markets show downturns, these investors can convert their holdings to stablecoins and be safe from volatility without turning their cryptos into cash.
With the help of Stablecoins, you can move in and out of the volatility swiftly without cashing out.
The Bottom Line
These were just some pointers that you should have at the back of your hand as an investor or a trader. They may sound like common sense but let me tell you; they are the most overlooked.
So I hope the above tactics help you make the most of volatility without much hassle.
FAQs on Ways to Tackle Volatility in Crypto Markets
1. Why is Crypto Market so Volatile?
If you compare the cryptocurrency market with the stock markets, you will realise it’s a relatively small financial market. The cryptocurrency market isn’t fully matured yet, unlike other markets that have completely developed; hence it is so volatile. But as time passes and the cryptocurrency market becomes more established you will see the volatility intensity going down.
2. Which are best Stablecoins to invest in?
There are more than 200 stablecoins out there; some interesting ones to look at could be these.
3. How can I Diversify my Crypto Investment Portfolio?
Your cryptocurrency investments can be diversified between established and newly entered cryptocurrencies. However, you need to strike a balance between them based on your risk appetite.
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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