Have you ever experienced riding a rollercoaster? If yes, you can probably recall how stomach-churning they are—and yet, they are also exciting, making you scream and laugh at the same time. Well, it’s pretty much the same feeling when you’re navigating the crypto industry—it’s a wild ride for everyone who gets into it and binance data shows that through the price fluctuations on the daily charts.
This volatility scares some people away and causes investors to make the worst mistakes and lose their money. Many times, it is described as this fearsome enemy that can cause irreparable harm. And while there is some truth to it, it’s essential to highlight that there’s always nuance – things are never black and white. While volatility can lead to substantial losses, it also offers investors tremendous opportunities to build their wealth – when you think of volatility from this perspective, it doesn’t look so frightening anymore, right? What we’re saying is that volatility is just too complex to be considered good or bad. In reality, it is what investors make of it.
How risky is crypto volatility for investors?
When it comes to the world of cryptocurrencies, the truth is that volatility can create a high-stakes arena: while it does offer appealing profits, investors must be willing to take the risk of substantial losses. There are indeed many situations where investors make decisions that have a negative impact on their financial well being because they act out of greed or fear and follow herd mentality. Extreme volatility is indeed frightening as it leaves everyone feeling uncertain (think of the 2008 Financial Crisis), but the good news is that this is rare, and right now, we aren’t seeing it in the market – volatility in crypto is relatively moderate and happens because investors respond to news and information.
First of all, cryptocurrencies are different from traditional assets like diamonds or gold in the sense that an intrinsic value doesn’t back them. Their prices tend to fluctuate based on various factors that range from news coverage and market sentiment to regulatory changes and technological innovations. Market adoption is another factor that can affect the supply and demand of crypto, causing sudden price movements. Suppose the acceptance of Ethereum or Bitcoin as a payment method grows; in this case, the demand for the assets naturally increases, resulting in greater confidence in the asset and allowing people to speculate on the asset’s potential price increases.
Speaking of speculation, market volatility is highly linked to investor behavior. Many investors seek short-term gains, and for this reason, they engage in rapid buying and selling, leading to price fluctuations. On the other hand, investors committed to crypto in the long run keep the asset in circulation, which helps its price stabilize and sometimes even increase.
All these factors play a role in the volatility of cryptocurrencies, and there is indeed the possibility of losing fortunes in the blink of an eye. With this in mind, it’s worth noting that each investor can react differently to the same level of risk. Some people may simply not feel comfortable with losing their investment so quickly, which is why risk tolerance is important to evaluate when it comes to your decision to invest in crypto.
Volatility shouldn’t be something to fear
You may be surprised to hear this, but crypto market volatility can be healthy to a certain extent. That’s right – if you think about it for a while, it’s the price fluctuations that keep things exciting and create so many fantastic opportunities for profit. But some just rush into deeming volatility as “bad” and “scary”. However, these labels aren’t necessarily correct, or at least, not in all cases. Sure, if you are risk-averse, it’s unlikely that you will know how to manage a high-volatility investment like crypto because you are more interested in maintaining stability (which, let’s be honest, isn’t something that crypto can provide). On the other hand, some investors believe that high volatility is what makes crypto such an appealing asset, as it creates the possibility for such substantial returns.
If you know what you’re doing and have a robust plan in place, you’re in a better position than someone who is unprepared and makes investment decisions without researching in advance. When you feel confident in your choices because you know they are informed, you no longer see volatility as this enemy that you need to fight. In other words, it’s more about your reactions to market volatility than the volatility itself. While some things are definitely not in your control, luckily, you can choose your actions. For example, you can stay calm and rational and thus, prevent impulsive decisions that will lead to devastating outcomes. Similarly, instead of just doing what someone else in the market is doing, you can choose to do your own research, and understand an asset before investing in it. These things can help you mitigate potential risks, thus helping you reduce the likelihood of massive losses.
Taming volatility: tips to keep in mind
Volatility makes investors feel overwhelmed, and it’s not difficult to understand why this happens: after all, humans don’t like unpredictability, especially when their money is at stake. If you want to invest in crypto, you need to approach it smartly, namely, come up with a good plan and be ready to adjust whenever necessary. Most importantly, you need to keep a long-term perspective, because this will help you avoid making rushed decisions just because you fear losing a “big” opportunity. Moreover, portfolio diversification has always been a principle for disciplined investors, and there’s a reason for it. Spreading your investments across different assets can help ensure that you won’t lose your entire investment if an asset behaves poorly. When looking to diversify your portfolio, make sure to conduct market research so that you can make an informed decision and stick to reliable assets.
The bottom line
As you can see, volatility can’t be deemed as an investor’s friend or enemy because, in the end, it’s what you make of it. If you take the proper steps to mitigate risks, and make an effective plan, you will be more confident when investing in cryptocurrencies. It’s important to remember that crypto investing is a unique experience for everyone, and what works for someone may not work for another person due to specific financial objectives and risk tolerance. So, do your research, exercise caution, and remember to keep a sound judgment whenever making a decision.
