Why so volatile?
If you’ve been involved with crypto for any extended period, then you’ve probably seen just how messy, unexpected and incredibly volatile the markets can be. While this can be scary, it’s important to realize that it’s just a normal consequence of the fact that crypto is a very new asset class, and this brings with it several different factors that contribute to higher volatility. From the speed at which new assets are launched to the relative lack of regulation, it will likely take quite some time before the crypto markets mature to the point at which crashes of 20% or more in one day become extremely unusual.
Another important factor is the relatively small size of crypto: in spite of all its growth, the entire market cap of crypto is less than 10% of gold, and less than 3% of the S&P 500 (index that includes the 500 largest companies in the US). The lower the market cap, the less buy or sell pressure it takes to move the price up or down, respectively - this is also the reason why lower market cap stocks tend to be far more volatile than those of the largest companies in the world.
How to (safely) navigate volatility and price crashes
The volatility of crypto will almost inevitably trend down over the long run, but this probably isn’t too comforting if you’re currently staring at a chart that’s stubbornly refusing to find a bottom. If that chart is your portfolio value - and everyone in crypto has been there at some point or other - then it’s all the more painful. So, what steps can you take to protect your bull market profits? The strategies that are available to you can be broken down into two aspects: your trading or investment strategy and the way you store your crypto.
Starting with the way you trade or invest: even though there are countless ways to do this profitably (and if you want to learn more about these, you can check out the free NewsCrypto Academy), there are still some key principles that apply to every style of trading out there. The first, one that you’ve doubtless heard over and over again, is that you should never invest more than you can afford to lose. Whether you’re looking at a scalp trade that will be open for an hour at most or an investment that you plan to hold for 5-10 years, it’s always paramount to keep your risk at a level that you’re comfortable with.
What’s more, because all crypto assets are still heavily correlated to each other, this needs to hold not just for each individual trade, but for all the trades you plan on keeping open at the same time. Briefly put, the question you need to ask yourself isn’t “Will I be okay if I lose this one trade?” but rather “Will I be okay if the market nukes and I lose every single trade I’ve got open right now?” If the answer to this second question isn’t a definitive yes, then you need to rethink your approach immediately. The one possible exception to this rule pertains to very long-term investments that you’re extremely confident in, but even here it’s never a good idea to take risk too far. For example, let’s say you want to have a sizeable chunk of your net worth in Bitcoin: sure, it’s likely that Bitcoin crashing 90% wouldn’t leave you completely unscathed, but it still needs to be the case that you would survive and have enough liquid (non-crypto) assets so that this wouldn’t drastically impact your life.
The other crucial aspect of keeping your bull market profits (or keeping your fresh investments, if you’re one of the brave traders to enter the space in a downtrending market) is the question of where and how you store your crypto. If you’ve seen more or less any headlines in Q2 2022, it’s likely that you’ve noticed different high-profile projects either crashing completely (as was the case for Luna) or running into severe problems with liquidity (as happened recently with Celsius). While we don’t need to go into the details of these events here, the interesting thing to mention is that these things mostly happen in times of instability, when most of the crypto market is in a severe downtrend.
The reason behind this is simple: in a bull market, it’s easy for any protocol to remain solvent and liquid, as rising prices and a constant supply of fresh capital entering the space mean it’s easy to find ample opportunities for passive income, even with APYs of 10%, 20% or even more. If earning this much on your stablecoins – supposedly in a risk-free way – sounds too good to be true, that’s simply because it is. Yield is always proportionate to risk, whether you’re looking at bonds or crypto, and anything that’s offering double digit yields has to include some measure of risk (not to mention protocols with five-digit APYs). Even though these strategies can seem to work perfectly in bull markets, it only takes a short period of instability for the inherent risks to rise to the surface and for protocols and even institutions to start becoming insolvent.
This becomes especially troubling when the protocols in question are so large that their insolvency becomes a systemic risk for all of crypto, one which can easily spread to other assets and take the markets down with it. It’s for this reason that you need to be especially careful with where you store your coins, and the gold standard in this regard is using self-custody with a hardware wallet. We’ve got plenty of info on how to do this properly – both in the NewsCrypto Academy and in other How-to Crypto posts – so take these unstable times as an opportunity to invest a bit of time to keep your assets completely safe and under your control. After all, that’s a good risk-reward opportunity if there ever was one!