Crypto investments are not for the faint-hearted. The market is well-known for dramatic rises and drops. Certainly, such violent market ebbs and flows stir up concern, even in the most vehement of HODLrs.
Recently, the bitcoin market has been especially volatile, with what many considered the bear market coming in around May this year. A promising upswing was seen in July, with the price currently sitting at $38,004.39 at the time of writing.
BeinCrypto spoke to a number of industry players about how to deal with a volatile market, and what people are missing when it comes to their crypto investments.
Market volatility 101
No matter what market one navigates, there are ebbs and flows – be it traditional stock or decentralized finance. Even the vendors at a local produce market experience a type of market volatility in accordance with local factors.
However, the difference is the amount of volatility and why it occurs within the crypto markets compared to traditional investment spaces.
A certain amount of volatility is healthy for markets. It allows for demand and an increase in profit. Though volatility often has a more negative reputation. This is mainly due to the chaos and unpredictability that comes along with it.
Generally, the Volatility Index (VIX) measures the fluctuations in the traditional markets. On the index, healthy values hover between 12 and 20. When the volatility surpasses this range, it falls under a volatile market. A classic example was the financial crisis of 2008, when volatility reached almost 90.
Most research focused on traditional markets shows that volatility correlates with some of the following factors. The increased intensity of news cycles tends to bring on skeptics, an increase in institutional investors in a specific niche of the market, and derivatives markets.
Typically, in terms of investments, assets fall into a volatile or non-volatile class. The latter consists of more commonplace undertakings such as gold, bonds, and cash. On the other hand, volatile assets include stocks, derivatives, and of course – cryptocurrencies.
Crypto market fluctuations
It’s a general consensus that crypto markets move quicker than those previously mentioned. There is also no standard such as the VIX to specifically measure the crypto market fluctuations. A quick glance at what happens during the week in the crypto world is enough to send some traditional investors running the other way.
For example, the popular altcoin bitcoin cash (BCH) was up 40% in one day last week, while over the course of the entire week, it saw an increase of 130%.
For the most part, the causes of market volatility are the same in both financial markets, especially when it comes to the influence of the news media.
This year alone saw some of the most volatile movements surrounding one single person: Elon Musk. Tweets coming from Musk throughout the first half of the year caused both major spikes and dips.
However, there are some indicator tools out there. The Crypto Fear & Greed Index is a good market indicator for bitcoin via public emotion and sentiments toward the currency on a given day.
There are also theories that address weekend volatility in the crypto market. Many of which point to the way traders reassess their week and the week ahead. Nonetheless, with a lack of liquidity in the crypto market and underdeveloped derivatives market, the volatility in the crypto space is even more hostile.
Part of crypto’s history
Of course, speculation and real-time movement can cause a lot of hesitation towards the cryptoverse. Those who work in the field have better insight into this volatility.
As far as crypto market volatility, Ryan Berkun, Founder and CEO of Teller Finance, said it’s nothing new for seasoned HODLers:
“They have seen cyclical movement in the space since its inception. For crypto newcomers and veterans alike, adopting a long-term mindset helps to mitigate the thrill and/or agony of an up-and-down market. With a “zoomed-out” approach, day-to-day or even month-to-month price movements have little influence over the long-term strategy. From this perspective, the importance of research cannot be overstated. Having a clear understanding of the value and purpose of the projects helps to remain confident over the long haul.”
Crypto market options
Despite volatility being almost built into the market itself, George Harrap, co-founder of Step Finance, points to the multitude of options available for investors.
“Hedging in crypto markets takes many forms. That could be simply selling into stablecoins, shorting a particular coin that you own, buying put options on a particular coin,” he says,
“It’s about reducing risk exposure to the price of something and there are lots of ways for this to be done in CeFi and DeFi. We are seeing more people get used to various hedging tools via growing interest in perpetual futures trading markets and new options protocols in DeFi.”
From HODLers to newbies
For those thinking about HODLing despite volatility, member of the Gelato Network, Hilmar Orth, has this to say:
“Usually most investors are better off simply investing long term and hodling their assets. However, in periods of extreme volatility, more short term strategies like providing liquidity around a fairly broad range on Uniswap v3 could turn out to be quite lucrative. Investors can actually profit from short term market volatility as long as prices move sideways in the medium term. If a clear breakout occurs then investors can switch back to their default long term strategy.”
Another option, by Red, Community Foreman, and Harvest Finance, involves yield farming.
“A down market presents many opportunities if you look beyond raw market pricing. One of the best ways to hedge against volatility is to participate in yield farming. If you are a “diamond hands” who doesn’t want to sell, yield farming with your assets provides passive income that can help offset any negative movement in market pricing,” he says.
It’s about conviction
Regardless of the volatility, Doug Leonard, CEO of HiFi Finance, thinks it best that investors don’t follow the price and invest with conviction.
“The more you follow the price action of an asset, the more you will have the tendency of doubting the beliefs and convictions which ultimately led to your investments in that asset. Additionally, following the price usually leads to a short-term way of thinking regarding the future of crypto.”
“In order to quickly figure out whether or not you really have full conviction in a crypto asset, simply ask yourself whether or not you would be ready to bet all your holdings on this asset. If the answer is negative, don’t invest. This is of course just a psychological exercise, don’t put all your eggs in one basket,” he says.
Volatility as a research tool
For some, volatility is a tool for information gathering.
James Gillingham, the founder, and CEO of FINXFLO says, “unlike traditional markets, the cryptocurrency market is open 24/7. While it has been more volatile in nature, the market trends also give us a greater number of data points to glean information from. This, in turn, creates a springboard for better investment decisions.”
“Remove emotions when trading. Take a step back and consider the possibility that there is a larger picture at work here. Never let FOMO drive your investment decisions.”
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