Markets are inherently risky, and the crypto market is no exception. Cryptos witnessed extreme volatility in the years gone by. The volatility could stem from market manipulation, business failures, and hacking of investor accounts. Interestingly, volatility attracts investors who hope to profit from gyrating prices. Yet, dealing directly with cryptos might be difficult for many investors due to their complexity and lack of liquidity. This blog defines market volatility and explains how crypto portfolio management would help you navigate market risks.
Understanding the volatility in the crypto market
Volatility measures how much an asset’s price has fluctuated upward or downward over time. Generally speaking, the riskier the asset, the more chance it has to deliver significant returns or greater losses over short periods compared to less volatile assets.
What causes volatility in the crypto market?
By design, crypto is erratic. This is because the marketplaces for crypto are speculative, and there is no formal regulatory framework for their trading. Therefore, compared to equities and bonds, crypto prices fluctuate more. However, the unpredictability may be beneficial or adverse to investors, depending on their perception.
How to measure volatility in the crypto market?
When investors try to quantify volatility, they frequently refer to historical volatility obtained from an analysis of prices over a given time frame. However, implied volatility is the term for the art of forecasting future movements, which is a less precise science because no one can accurately anticipate the future.
You can measure volatility in two different ways:
● You can employ a technique known as beta, which calculates a stock’s volatility vis-a-vis the whole sector (the typical benchmark is the S&P 500 to the US market).
● To determine how far an asset’s price has deviated from its historical average, you may compute its standard deviation.
The impact of volatility on crypto portfolio management
Volatility is natural to any market activity. However, managing a crypto portfolio is much more challenging than managing a portfolio comprising traditional financial products. More recently, crypto markets displayed extreme volatility during 2016-2022.
Healthy volatility in mainstream markets shows the maturity of the market. Hearteningly, volatility in the crypto market is displaying signs of maturity with the entry of institutional investors and trading firms. The mainstream adoption of crypto and the changing global regulatory landscape is likely to hasten the evolution of the broader crypto market ecosystem.
Strategies for managing risk in a volatile market
All mature investors understand that success in the stock market depends on having a good grasp of risk. Investors may safeguard their portfolios against significant losses by comprehending risk and learning how to reduce it. There are many risk management strategies, and choosing the right one depends on your individual goals and objectives.
Building a diversified crypto portfolio
It entails spreading your money across various asset classes, such as stocks, commodities, and crypto. Diversification would reduce investment risk, which would boost profits.
Setting stop-loss orders and using risk management techniques
Placing stop-loss orders is a practical approach to controlling a trade’s risk of loss. First, it helps dealers in securing profits.
They bring discipline to an individual’s short-term trading efforts. Finally, they obviate the need for daily (or hourly) monitoring of investment portfolios.
Staying up-to-date with market developments and news
Keeping yourself updated with market developments and news related to different industrial sectors is crucial. Fortunately, there are a few simple strategies to stay current with developments in your sector.
Implementing a long-term investment strategy
It’s crucial to enter the market with a strategy if you intend to invest in crypto long-term. Only invest funds you can afford to lose if the investment fails in one or more cryptos. Doing so will allow you to withstand potential volatility and invest long-term.
Advanced techniques for navigating volatility
Using a cost-averaging crypto investing strategy is appropriate for long-term wealth building.
Utilizing hedging strategies
Hedging crypto is deliberately initiating transactions to ensure that changes in the value of the other position would more than offset a gain or loss in one position.
There are several ways to create a crypto hedge, but three are popular: Short-selling, using CFDs to hedge and using futures to hedge.
Incorporating alternative assets such as real-world assets and commodities
Property and commodities, probably two of the oldest forms of investments, are examples of alternative investments. Investment choices also include unconventional ways to invest in specialized vehicles like hedge funds and private equity firms.
Besides these, alternative assets may include investment in conventional and non-conventional assets such as bonds and stocks.
Implementing algorithmic trading strategies
Algo trading, sometimes called automated crypto trading, employs computer programs to execute a specified set of instructions for initiating a transaction to produce profits at a pace and frequency that are impractical for a human trader.
Using volatility analysis tools to identify profitable trades
Many investors use technical analysis to guide their trading decisions in the volatile crypto market. The study of market activity using charts and indicators is known as technical analysis. It can assist you in spotting trends and potential price movement reversals.
Emotional intelligence in a volatile market
The capacity to manage one’s own and other people’s emotions and use that control while making crucial decisions is known as emotional intelligence. Using your emotional intelligence will hold you in good stead, given the inherent unpredictability of the market.
Managing fear and greed in a volatile market
When investing in crypto, you may employ this strategy to overcome your anxiety and greed. Have a clear plan, consider leverage, eliminate double-dipping on losing positions, put brakes on them, and abandon your get-rich-quick mentality.
Sticking to a well-defined investment plan
You must adhere to a well-defined long-term investment plan. The rule of thumb is that the power of compounding will work wonders for your investment if you play the long game.
Willingness to cut losses when necessary
Even though stock market indices usually increase in value over an extended period, individual equities don’t always follow this trend. Hence, less successful ones might experience prolonged losses. Individual investors often keep loss-making stocks in the hope of a rebound, only to see them decline even lower.
Keeping a long-term perspective to navigate short-term market fluctuations
Market turbulence is unavoidable since markets always experience short-term ups and downs. Volatile markets frequently exhibit large price swings and intense activity. Avoiding volatility ultimately entails remaining invested and ignoring temporary variations.
Conclusion
The potential for huge gains makes excessive volatility attractive to confident crypto investors. However, there are strategies for reducing the adverse effects of volatility for investors who are less risk-tolerant, such as dollar-cost averaging. In general, long-term investors who have reason to assume that an asset will increase in value over time don’t need to worry too much about short-term instability.
FAQs
What is crypto portfolio management?
Crypto portfolio management involves strategically organizing and overseeing one’s investments in various cryptocurrencies.
How do I manage my crypto investments?
1. Diversification: Spread your investments across different cryptocurrencies to minimize risk.
2. Research: Stay informed about the market and thoroughly research the cryptocurrencies you intend to invest in.
3. Set Goals: Define clear investment goals and timeframes to guide your decision-making.
What is volatility in crypto?
Volatility in crypto refers to the degree of variation in the price of a cryptocurrency over time. It measures the extent of price fluctuations and the level of risk associated with an asset. Cryptocurrencies are known for their high volatility, with prices often experiencing rapid and unpredictable changes.
How do you deal with volatility in crypto?
1. Diversification: Spread investments across different cryptocurrencies to reduce the risk associated with the price fluctuations of a single asset.
2. Risk Management: Set clear risk tolerance levels and use tools like stop-loss orders to automatically sell assets if prices reach predetermined levels, limiting potential losses.
3. Research and Analysis: Stay informed about market trends, news, and technological developments. In-depth research helps anticipate potential price movements.
4. Long-Term Perspective: Consider a long-term investment horizon to ride out short-term price fluctuations. This approach is often more resilient to market volatility.
