Dealing with cryptocurrency price volatility, which can be extreme, to say the least, is difficult for virtually any investor. How can an investor, especially those new to cryptocurrencies, deal with price fluctuations and expect to make a profit in the process?
While a profit certainly can’t be guaranteed, this article describes are a few useful tips any cryptocurrency investor will benefit from when it comes to price volatility.
A Simple Buy-Rule, Any Investor, Can Use
Trying to time a cryptocurrency price movement is impossible. For bitcoin (BTC), it might drop $500 in a day and if you buy, thinking you’ve picked off a low point, it can just as easily continue dropping another $500. Maybe not all in one day but over several days. Watching your BTC value continuously decline can be to stomach.
However, buying on drops is not far off the mark. It’s waiting for the quick rise above the entry price that gets most investors in trouble. Instead of buying and trying to take a profit on the same day, buy some on a drop and hold. It will either drop more or not. If it does drop, buy a little more. This is a form of dollar cost averaging but only on drops. This technique will continue to push down your cost basis.
At some point, BTC should begin rising and perhaps even above the average cost basis. Any selling out of the position above the average cost basis will be for profit.
Holding for a longer period through all of the volatility requires a shift in mindset. No longer is the investor trying to capture a profit in a single day or panicking if the price continues to fall. With a long-term outlook, short-term price movements don’t matter as much.
The Source of Volatility
Knowing what causes any day-to-day swing in a cryptocurrency is difficult to discover unless there is some news available. The thing is, there’s almost always someone coming up with a reason for a cryptocurrencies wild price movement on any given day. Sometimes these pundits are right, and sometimes they are not.
You’ll find that news of one cryptocurrency will cascade price action in other cryptocurrencies. Depending on how quick any news is published, this domino effect can happen on the same day. As one well-known cryptocurrency drops and news comes out, others follow and eventually a large number of cryptocurrencies are dropping on news that might not have anything to do with them.
A big part of these swings is due to smaller, emotional investors holding cryptocurrencies. They get shaken out more easily than an institutional investor. When these smaller investors sell on a whim, it can cause a cryptocurrencies price to gyrate radically.
Coordinated selling or buying can also impact prices. “When you have an unregulated exchange, the ability to manipulate prices goes up significantly,” SEC Chairman Jay Clayton told the Washington Post. “Just a few coordinated sales can change the price.”
Why Volatility Will Eventually Decrease
As cryptocurrencies move beyond digital money, stores of value or an exchange of value, more cryptocurrencies will be held for uses other than short-term trading. This means their prices won’t be as subject to the emotional reactions of short-term traders.
“It’s simply a sign of bitcoin’s relative youth compared to other asset classes, and as bitcoin continues to enter the mainstream, we’d expect the volatility to decrease,” Andy Bryant, COO of BitFlyer Europe, told Business Insider.
Developments related to blockchain technology are also important to cryptocurrency price stabilization. Without the blockchain, cryptocurrencies, decentralized apps and tokens wouldn’t be possible. The blockchain is allowing cryptocurrencies to find uses outside of digital currency. As more technologies built on blockchain come online, they will further push the uses of cryptocurrencies outside the realm of pure digital currencies.
“Digital currencies are just one, thin, tiny layer scratching at the surface of what blockchain technology and decentralization are all about. We’re diving deeper: Tokens as a utility, tokens as property, application tokens redefining value — not as just a cryptocurrency,” Zach LeBeau CEO of SingularDTV, said in an interview at the SingularDTV studio.
Regulation of exchanges and cryptocurrency will also help to decrease volatility. Exchanges that are regulated and backed by federal insurance have less of a chance of being hacked. There will be strict regulatory guidelines that exchanges have to follow. Many of these guidelines will be security related. Fewer exchanges being hacked means less news about exchanges being hacked and thus fewer reasons for wild price swings.
It will be more difficult to regulate cryptocurrencies than exchanges. Exchanges are owned by companies and centralized. Cryptocurrencies are decentralized and are also a new category of finance.
“The SEC doesn’t have jurisdiction over pure cryptocurrencies — but we have to watch it because they’re integrated with the markets we do oversee,” Clayton said to the Washington Post.
Investors Should Be Focused on The Long Game
Cryptocurrency prices will continue to be volatile in the short-term. Any investor will simply have to deal with such volatility, which can and does get extreme. Those investors who can see past short-term volatility and are looking at how cryptocurrencies and blockchain will change and enhance the financial industry are the ones who will likely be rewarded for their patience. Research Optimus being a research and analysis company has been observing technological movements closely and thrived to offer solutions in line with industry trends. To learn about our research and analysis capability and engagement model, contact us today.
– Research Optimus