How to navigate price volatility in cryptocurrency

30 March 2021
Cryptocurrencies are among the world’s most volatile investments. On any given day, a cryptocurrency’s price may rise or fall by over 50%. Such price volatility is rare in more traditional investments like shares, property and bonds.

Managing such extreme price volatility and uncertainty can be tricky. This is especially so for first-time cryptocurrency investors, of which there have been plenty in recent months following bitcoin’s record-breaking price growth.

For investors who may be struggling to come to terms with the price volatility of cryptocurrencies like bitcoin, we have some strategies you may want to consider.

Navigating volatility in bull markets

When markets are euphoric, first-time cryptocurrency investors are particularly prone to falling into the trap of believing that prices will only ever increase. The allure of more upward price volatility is enough to keep them from selling and realising potentially life-changing amounts of unrealised profits.

The internal dialogue of these investors typically goes something like this: “Yes, I’ve already made 100% on this cryptocurrency investment, but if I sell now, what’s to say it won’t go up by another 50% tomorrow?”

Being stuck in this mindset is emotionally and mentally draining. To avoid this, you may want to consider navigating upward price volatility with grace by putting together a profit-taking plan. For example, you might plan to sell X% of your position in the event your investment rises by Y%.

Making a profit-taking plan could mean that you have exited the market before a price rise. But, at the end of the day, no investor or trader knows for certain when the market will top. If anyone says they can, alarm bells should be ringing in your head.

Related article: Bull versus Bear Markets

Navigating volatility in bear markets

Volatile market downturns can be hard to stomach. This is especially the case for those who rushed to invest in cryptocurrency. In other words, they succumbed to FOMO (fear of missing out).

When it comes to managing downward price volatility, it can be a worthwhile exercise for investors to examine their reasons for buying cryptocurrency in the first place. If these reasons still make sense, then enduring price volatility in a bear market tends to be relatively less challenging.

Certain cryptocurrency investors navigate volatile market downturns by adding to their existing positions or investing in certain cryptocurrencies they’ve been eyeing off. Indeed, Warren Buffet’s famous quote, “be greedy when others are fearful” is just as applicable in the cryptocurrency market as it is in the stock market. Of course, this strategy is highly risky and requires prudent management of one’s spare cash.

Does investing in cryptocurrencies suit your investment strategy?

Cryptocurrency investing isn’t for everyone. Some know this the moment they lay their eyes on bitcoin’s price chart, whilst others realise only after buying in and experiencing the volatility first-hand.

If you’re a new cryptocurrency investor and are struggling to stomach the at-times wild price fluctuations, it may be that cryptocurrency is simply not an asset class that suits your risk profile. That’s neither good nor bad, it just is. Selling your cryptocurrencies and investing into a less volatile asset class may be more congruent with your risk profile and investment strategy.

When you zoom out and look past the short-term volatility, the cryptocurrency asset class and crypto industry have exited every market cycle stronger than they entered. Ultimately, cryptocurrencies are attempting to redefine all sorts of global markets—be it money, financial services or even the internet itself. If long-term investors can withstand the volatility, there is the possibility that they could reap the rewards later on.

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This article was reviewed by our Content Producer Marissa Hayden before it was updated, as part of our fact-checking process.

Nugget’s News is a digital media channel that delivers unfiltered coverage of the latest developments in cryptocurrency, housing, precious metals, commodities, stocks and other financial markets.

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