Cryptocurrency is a new and exciting phenomenon in the global financial market. In many ways, these currencies have unique qualities compared to other financial assets. One such feature is very high volatility.
Crypto Volatility defines the rate at which an assets price varies with time. Prices move aggressively up and down daily. Many people have made millions in the market, while others have lost both large and small investments in the sudden market changes.
This guide will primarily focus on how you can use the volatility to your advantage and tips on how to trade and ensure you stay calm in a volatile market.
Why are Cryptos so Volatile？
Ever wondered why cryptocurrencies are so volatile？ The crypto market has been highly volatile since day one, but it has become particularly wild in the last few years. Many factors determine the price fluctuations. Here are some of the leading market factors that contribute to cryptos high volatility:
The crypto market is still new and immature
Cryptocurrencies are only virtual; hence their price is purely determined by demand and supply
High speculation
Influence from the media and prevailing headlines
Uncertainty of future value of cryptos
High inflation nations
Keep in mind, when dealing with high-risk investments, one wrong decision could wipe out your years‘ worth of savings. Here’s how to stay ahead.
1. Margin Trading
Margin trading uses borrowed money from cryptocurrency brokers to trade a financial asset. This is the riskiest option because this will seek to increase profits by adding more risks to trade. A lot of leverage could lead to faster liquidation of assets than you realize it.
However, because there are millions of dollars at play, this option remains one of the most popular. Margin traders in cryptos ought to be more cautious, especially if you are new to trading. Even with ample knowledge on the correct entry and exit points or identifying charts and market trends, this does not eliminate margin trading risks.
It may be possible to get around it effortlessly if you have some background knowledge on hedging and risk management approaches.
2. Have Good Risk Management Strategies
One vital component of success for all traders no matter the market is risk management. It does not matter the size of capital you trade or invest in because losses are unavoidable, especially in a highly volatile market such as cryptos. Risk management, however, helps minimize the losses while increasing the gains.
If there is no good risk management approach, a black swan event could wipe out whole accounts. The popular strategies also become trickier with increased volatility. As such, it would be wise to reduce the position sizes of trades on indicators you have lower confidence in.
The high leverage used in forex cannot be applied in crypto trading. Another essential factor in developing a profitable trading system is analyzing the risk/reward ratio.
3. Consider Dollar-Cost Averaging
For Dollar-Cost Averaging, you need to first decide the amount you want to invest in a cryptocurrency. Then, rather than investing the full amount, you divide it into smaller investment amounts of equal installments over a certain period. Committing to DCA means that, sometimes, you will be investing when the value of cryptos drops in value and other times when you buy during a market sell-off.
DCA is more like placing an order for a recurring buy during a cryptocurrency exchange. It potentially provides the chance to profit when the market falls without risking a lot of money in one investment. One can generate more profit via purchasing when the market falls and selling when the market tops.
However, the most notable disadvantage of DCA is that one may miss on a significant gain if they had invested a lump sum. However, any substantial windfall profits necessitate accurate market timing, which is hard even for professional investors. DCA is a safer and profitable method to take advantage of huge market dips.
4. Buying Bottoms
All traders would like to buy low and sell high due to the popular trading rule: never catch a falling knife. This rule discourages traders from buying in a market where prices fall and portrays how dangerous it can be to trade in a falling market. However, most people will discourage you from doing it because they have no idea how to do it.
HODL is an acronym for ‘Hold On for Dear Life’ that describes buy and hold strategies. This strategy is used by people who keep their bitcoins for extended periods. The term encourages traders to remain strong even when prices are highly volatile. However, people with little patience wait for one of their alt-coins to increase and then sell it for Bitcoin.
5. Remain Calm
Even the most skilled traders can get spooked in times of high volatility in the market. Staying calm during the markets high volatility is an advantage to an intelligent investor because emotions could lead to long-lasting consequences. If you would like to build an effective long-term trading strategy, you should focus on diversification, quality, and active investing.
Ben Graham said that any investor who succumbs to unjustified market regresses pressure in his holdings is irrationally transforming his fundamental advantage to a fundamental disadvantage. Therefore, staying calm in volatile markets is a wise approach for any investor. Focus on the long-term rather than short-term gains.
Conclusion
A lot of factors influence cryptocurrency volatility. Market size, liquidity, and inflation are some of these variables. This may be a bad or good thing for your investment decision. Despite the highly volatile nature, follow the tips on this guide, and you will easily stay on top of the trading game.
Every year, thousands of investors profit from cryptocurrencies volatility. Caution, however, is the key takeaway from this guide. It should be your mantra to ensure you are making well-informed decisions. Lastly, losses are inevitable, but you can manage and control how much money you lose from trading in the long run.