Everybody was skeptical about Bitcoin right until it shot up in 2017. Then, everybody and their dogs wanted to know what Bitcoin was.
What most people seem to miss is that volatility works both ways. Granted, Bitcoin’s volatility helped investors squeeze three-digit returns. However, those who stayed invested know that Bitcoin prices plunged just as hard not so long after. So, should volatility be construed as good or bad?
Depending on what a person does in the crypto space, volatility can be a friend or a foe. For instance, a trader who is using a scalping strategy will have a positive attitude towards volatility. Someone chasing capital gains, though, may find volatility nightmarish.
For context, let’s compare the prices of USDC and BTC over the past one year:
- How to Deal with Cryptocurrency Volatility
How to Deal with Cryptocurrency Volatility
Unfortunately, cryptocurrencies are inherently risky. Take Bitcoin for example. In just 24 hours before this writing, BTC dropped by 4.09%. If you’re wondering which crypto are most volatile, there’s a massive list of parabolically volatile cryptos you can refer to.
Scary, huh? Well, it doesn’t have to be. There are a few ways to keep volatility from taking big chunks off of your returns. If your hands are shaking as you learn how to buy Ethereum just because of volatility, don’t sweat it. There are ways to manage volatility.
However, the best way to dodge volatility altogether in the crypto space is with stablecoins. We’ll talk about stablecoins at length shortly, but know that they are still cryptocurrencies and can be transacted pretty much the same way. For instance, you can buy USDC just as easily as you would buy ETH with a credit card.
Ways to Mitigate Cryptocurrency Volatility
Some may call volatility a double-edged sword. Those who are facing the wrath of the sharper side of the sword can make themselves feel at ease in a few ways. Let’s talk about what they are.
It’s not easy to diversify a crypto-only portfolio. It’s safe to say that most of the time an asset in the crypto-verse will likely trend in the same direction. For instance, think of the time when Goldman Sachs dropped the plan to launch a crypto desk. The entire crypto space bled like there’s no tomorrow.
The announcement was made on Sep 5, 2018. Let’s look at what happened to BTC’s price just 24 hours later:
Diabolical, isn’t it?
Here, diversification is in reference to an investor’s broader portfolio. Let’s set one thing straight – someone who is putting all their money in a cryptocurrency is just gambling money away. Cryptocurrencies should form a portion of your portfolio, not be your entire portfolio.
To determine what this portion should be, identify your risk appetite. Think of cryptocurrencies as an extremely risky stock that you’d be investing in for a long time. If you don’t feel confident, it’s always advisable to speak with a financial advisor.
2. Hedge your risk
Let’s talk about cryptocurrency futures contracts. These are fairly new and have been around for 4 odd years. Futures contracts can be used to hedge your position without ever having to own the underlying asset. If this sounds like jibber-jabber, let’s use an example.
Assume that an investor goes long on a crypto asset. The entire crypto-verse tends to move as one, and therefore, an investor can hedge the long position by just buying a Bitcoin short contract. These futures contracts may be purchased from your broker or an exchange like the Chicago Mercantile Exchange (CME).
However, you may want to check if your crypto exchange offers derivatives first. This will make things easier by allowing you to keep all transactions on a single platform. Note that derivatives can be extremely risky, and you should use them only if you thoroughly understand them and the risks involved.
3. Know when to HODL, know when to not
Crypto prices correct more sharply than equities. These swings come suddenly. It’s almost as if you’re standing on the street enjoying sunshine and bam – a truck runs over you.
However, ask a crypto investor if you should exit the position when the prices plummet, and they’ll say, “No, HODL!” HODL is short for Hold On for Dear Life.
There’s a lot of substance to this argument. Assuming you did your research before going in, and that the price drop is because of a non-fundamental factor, you indeed should HODL. Sure, this isn’t a way to mitigate volatility, but it is a way to manage volatility.
Exiting a position exactly when the price bottoms out is a terrible decision. It’s also important to not hear every Tom, Dick, and Harry in the crypto space. Learn to block out the noise and do some research before taking action based on someone else’s opinion.
4. Cryptocurrency affliate programs
A completely risk-free way to profit from the rapidly expanding world of cryptocurrency exists. Affiliate programs for cryptocurrencies. For every new client you refer to their platform, the majority of the best cryptocurrency sites, such as exchanges and lending platforms, pay large commissions in cryptocurrency. Read the following article if you want the know more about that. https://diggitymarketing.com/best-affiliate-programs/cryptocurrency
It’s understandable. When that price line turns red, it’s nerve-wracking. It’s no good when the price shoots up either, you feel you want to keep riding. Unfortunately, both good and bad things end at some point. This is why it’s important to approach investing with discipline.
Investors who have a hard time with discipline can use stop loss and take profit orders. All major exchanges offer them. These two are silver bullets for volatility. They require you to put a number on how much you’re willing to lose or how much profit you’re aiming for before you even initiate your trade.
Stop loss orders have a mechanism that automatically closes an order when the asset breaches a certain price so you can cap your loss. Take profit orders work similarly, but they are automatically closed when the trade is in the money.
Stablecoins – non-volatile crypto exposure
There was a time when trading fiat for crypto was cumbersome. An investor would first pay fiat and receive the crypto, then transfer it to an exchange, and only then could the investor exchange it for other cryptocurrencies.
During volatile times, the reverse process took just as much time and left investors with less than they could have earned. Clearly, this was a problem.
However, stablecoins offer a quick solution here. Exchanges offer stablecoins that are pegged to another traditional asset, usually a fiat currency. Stablecoins offer a quick exit when you want to close a position in crypto and move into fiat temporarily.
Stablecoins are relatively stable, but not risk-free. They come with different types of risks. Take Tether (USDT), the stablecoin with the largest market cap, for instance. USDT has, on multiple occasions, been accused of failing to provide an audit for its fiat reserves.
However, a stablecoin’s value tends to be far more stable than other cryptos like BTC or ETH. While there are ample stablecoins you could invest in, not all are worth your time. Let’s talk about a few of the most popular stablecoins you should consider investing in.
USD Coin is one of the most popular stablecoin choices out there. While Tether is the largest by market cap, investors have some apprehensions about USDT because of the lack of properly audited reserves.
On the contrary, USDC has the backing of well-known companies like Coinbase and Circle. The public can verify their data and internal audits, too. This increases investor confidence in USDC. What’s more, you can buy USDC on several platforms easily, just as you would buy any other crypto.
USDT continues to be the most preferred stablecoin among investors. It’s currently the third-largest cryptocurrency by market capitalization, following Bitcoin and Ethereum.
Granted, there are questions about if Tether actually has sufficient reserves to back USDT. However, it’s currently the most liquid stablecoin that has proven its worth in volatile times.
True USD (TUSD)
Another stablecoin pegged entirely to the USD is True USD. It comes with low transaction fees and fetches investors better interest rates on deposits than fiat currency, though not as high as USDC.
The reserves are attested to by a US-licensed accounting firm, Cohen & Co. It’s as stable as USDC and USDT and maintains $1 as its price pretty much all the time.
Binance USD (BUSD)
Binance, in an attempt to not be outdone, came out with Binance USD. BUSD is a stablecoin pegged 1:1 to the USD with a $1 price. There are no transaction costs involved with buying or selling BUSD, but wire transfer charges may be applicable.
BUSD enables investors to transfer cash pretty much anywhere in a matter of seconds, and at negligible cost. Investors also benefit from the support of BEP-2 and ERC-20 on the blockchain.
Manage volatility or stick to stablecoins
Take your pick. You must either manage volatility well or stay away from it altogether. Volatility and cryptocurrencies aren’t parting ways anytime soon. If you plan on investing in crypto, you need tools that can protect your money against massive swings.
One thing is certain, though – the higher the risk, the more the return. Investing in stablecoins generates meager returns because they are more about value preservation rather than returns. Investing in ETH could generate three-digit returns, but you’ll need downside protection so you don’t end up washing your wealth away.
This decision is a factor of an investor’s risk appetite. Someone with more risk appetite could generate good returns by investing in Ethereum and using risk mitigating strategies. However, someone who is risk-averse may have sleepless nights with Ethereum’s volatility. For them, it’s best to invest in stablecoins.