This is a guest post by Mike McCormick
Investors venturing into cryptocurrencies are currently facing a significantly volatile market. The crypto trading market, which includes Bitcoin among other coins, almost crumbled on June 22 when most coin prices dropped by up to 10% after two exchanges in Japan were hacked within 11 days.
Losses in billions of dollars are not quite uncommon in the cryptocurrency market cap. In December of 2017, Bitcoin hit a high of $20,000 only to drop to $8,500 by mid-March 2018. Cryptocurrencies have seen significant losses mainly due to hacker activities and other security concerns. Investors seeking to dip their feet in Bitcoin and other cryptocurrencies including Ethereum, Ripple, Litecoin, Monero, should have a good understanding of the volatile nature of the crypto market and how to manage this volatility.
If you trade in crypto coins, expect volatility, in fact lots of it. For instance, while a 5% movement in a single day in other traditional equities such as stocks is quite a big deal, a 20% movement in the cryptocurrency market in a day is practically normal. That’s the nature of cryptocurrency trading. You can check the exact price of different coins at different times or days in a good online cryptocurrency converter to understand the volatile nature of this market. Keep in mind that blockchain technology is still at an experimental stage so the possibility of a digital asset rising or dropping value considerably should not come as a surprise.
Understanding Cryptocurrency Volatility
Volatility is one of the most common measures of investment risk. It is basically a dispersion of both upside and downside return of an investment. Without going into more complicated mathematical equations involving daily standard deviations and square roots, let’s just say that the higher the volatility, the higher the potential to make gains or losses in a trade. Most cryptocurrencies including Bitcoin have a volatility of 100%, some as high as 200% or more. The risk of high volatility can be beneficial in determining the success or failure of your cryptocurrency trades.
When you’re analyzing the expected direction of conventional assets such as ETFs and stocks, you can always rely on technical analysis and past behavior to base your decision on. However, technical analysis functions are somehow limited when it comes to cryptocurrencies. Fluctuating prices of Bitcoin this year so far have proven that the cryptocurrency market does not behave in a predictable logical manner. So how does an investor manage market volatility when dealing in Bitcoin and other cryptocurrencies?
Here are a few tips and insights to guide help you manage volatility:
Do Your Due Diligence Before Investing
While analyzing cryptocurrencies, you won’t find as much fundamental key selling points in websites, whitepapers, and other publications. The direction and momentum of the market are influenced by FUD and FOMO sentiments. FUD refers to the spread of Fear, Uncertainty, and Doubt (FUD) mostly through the media while FOMO is basically Fear of Missing Out on a lucrative deal. These are fear-based factors that should not be your friend in cryptocurrency trading. Given the significant influence of FOMO and FUD sentiments, market analysis in cryptocurrency trading is only meant to give you a basic idea of the direction and momentum of different coins so you don’t dive into the market blindly like a headless chicken.
It is therefore important to conduct your due diligence beyond the current hype on cryptocurrencies to make sound investment decisions. With due diligence, you’ll know if a coin has viable functionalities, usage, and demand to justify its survival on the market. You’ll also understand the reasons for its current volatility and whether or not it has long-term prospects.
Make Good Use of Stop Loss Orders
A stop-loss order is a setting found in some trading exchanges or platforms such as Coinbase. The setting tells the exchange to sell a pre-set maximum amount of Bitcoin from your account when the price reaches a specific level. You only need to specify the price level and amount of Bitcoin to sell from your account then activate the setting. The downside of stop-loss orders is that you will miss out on profits when the price rises again. However, it protects you from significant losses when prices fluctuate drastically.
Holding For Long-Term Benefits
If you are in the cryptocurrency market for the long haul, the daily price movements should not be a cause for concern or alarm. You’ll be able to easily check the upward or downward movement and make the right decisions along the way. For example, you could see a gradual upward movement in the past three months despite the prices looking shaky every day. You’ll be able to comfortably judge the trend according to a long-term analysis, unlike the trader who is constantly worried by fluctuating daily movements.
Use the Available Tools
There are many traders who base their decisions on gut feelings and later wonder why things didn’t go their way despite their best efforts to judge the market. You can easily get the guesswork out of your trading activities by taking advantage of the available tools. The tools help you to make data-based decisions and even measure the performance of each decision you make. Use tools to set the limit of orders to minimize losses or even get a notification on your mobile phone when a given cryptocurrency goes higher or lower than your pre-set price threshold.
Volatility is inescapable in cryptocurrency markets. It is the nature of the beast. You can capitalize on volatility to make successful trades if you stay on top of the game. Avoid greed, the number one cause for failed cryptocurrency failures. The market is extremely fast paced where the price of a coin can go as high as 5 to 10 times in a few hours then drop considerably. It’s quite easy to get caught in a high-chase and end up making impulsive decisions in search of a high payout. Don’t forget that a quick reversal trend that could lead to outsized losses is possible as well. The important thing in managing volatility is to understand your risk appetite and manage it by treading the waters with caution.
Mike McCormick is the founder of CoinChiefs. He studies Business and Economic Reporting at New York University. He has a very good experience in crypto mining and loves to analyze anything crypto-related which makes him sit up and pay attention.
Photo Credit: CreditDebitPro
Great post, Mike! The volatility is probably more responsible for Bitcoin’s fame than the technology itself.
We’ve looked at these price fluctuations from a data science perspective and agree with your conclusion that traditional technical analysis indicators are pretty limited.
Machine learning, though, definitely shows promise. We even use it to find ideal stop loss targets–as you probably know, it’s easy to get stopped out in volatile markets.
For those interested, we have a “how to” post covering How to Use Machine Learning to Trade Bitcoin and Crypto.