In the world of crypto, there are more unknowns than certainties. One of the things we know for sure is that digital currencies are underpinned by blockchain technology and are meant to serve as an alternative medium of exchange or an investment tool. We also know that Bitcoin is the first and most coveted asset in the market and will most likely continue to dominate the crypto space for many years to come. The easiest way to get your hands on the flagship crypto is to buy Bitcoin with credit card or debit card via a cryptocurrency exchange.
However, these days, people are less concerned about these well-known technicalities and features and more focused on finding answers to the many questions that continue to arise, and volatility seems to be top of mind right now. After a few months of steady price appreciation and a longer-than-expected period of relative stability, the crypto market is once again disturbed by sudden price movements and increased volatility. The Bitcoin price dropped nearly 9%, reaching a two-month low and causing a
This served as a reminder for those who may have forgotten that the crypto market is as unpredictable as ever. But knowing that wild price swings are the norm when it comes to crypto doesn’t suffice to calm the waters. For traders and investors, these sudden fluctuations can result in considerable gains or losses, so it’s important that stakeholders learn how to react to these events and be better prepared for unexpected turns.
The factors behind crypto spikes and crashes
It would be much easier to make sense of crypto boom and bust cycles if we had a clear understating of the factors that cause them to happen in the first place. Based on what we’ve learned from previous crashes, crypto prices are influenced by elements such as:
- Market sentiment – people’s feelings and perceptions of different cryptocurrencies can influence their behavior and, therefore, cause the price of a certain token to rise or decline. When the forecast is positive, traders will rush to purchase an asset and drive its value up while negative attitudes toward crypto will trigger fear and, therefore, prompt investors to pull away, driving prices down.
- Supply and demand – just like all markets, crypto assets are also subjected to the influence of the supply and demand dynamic. When demand for an asset increases, so does its price. When the supply of an asset is higher than the demand, its value will inevitably drop.
- Macroeconomic factors – events and phenomena taking place in financial markets all across the world, such as inflation, price levels, changes in economic output, taxes, interest rates, government spending, etc., also have a say in the movement of crypto prices.
- Liquidity – when there’s enough liquidity in a market, meaning the ability to acquire a certain asset with ease, there’s going to be less price volatility, as opposed to low liquidity, which tends to lead to price fluctuations.
- Tokenomics – the term refers to the economic principles that determine how a cryptocurrency operates and its basic characteristics, such as production, distribution, utility, and so on.
- Whale activity – entities that hold large amounts of crypto, also known as whales, can influence the price of assets with their trading decisions.
That being said, each crypto dip bears the influence of a different combination of factors. For example, the most recent Bitcoin crash may be attributed to the expectation of rising interest rates and inflation in the future, regulatory uncertainty, as well as low liquidity in the Bitcoin market.
The crypto meltdown from 2022 was most probably caused by the collapse of the FTX and the crash of the Terra Luna coin, combined with market speculation and manipulation and rising interest rates.
How to master volatility in the crypto market
So, if price fluctuations are a given, what can traders and investors do to ride out volatility in the crypto market?
For starters, one should not forget about the golden rule of investing: don’t put all your eggs in the same basket. Digital currencies may have the potential to yield high returns, but they can also cause investors to lose all their funds in one stroke of bad luck. The most effective way to reduce risks is to create a more balanced portfolio that includes a variety of assets apart from crypto. It is generally recommended to limit crypto investments to 5% of the entire portfolio and complete the rest with other types of assets, such as bonds, stocks, or mutual funds, that will perform differently over time.
Next, one should not start trading or investing in crypto without having a clear objective in mind and an effective strategy to guide their steps and help them make the right decisions, regardless of circumstances. Beginners should start small and test the waters before they decide to put more money into crypto. Using a stop-loss order is also a great way to limit potential losses and avoid making rash decisions based on emotional responses. And obviously, no one should invest more than they can afford to lose.
It’s also important to acknowledge that in high-volatility markets, mistakes are inevitable. The purpose is not to avoid mistakes altogether but to treat them as learning opportunities that can help one build experience and refine their investment strategies.
And last but not least, one should keep an eye on the aforementioned factors that influence market volatility. It might be impossible to predict price movements, but it’s definitely easier to ride the wave of volatility when you’re in the know and stay up to date with the latest trends and developments in the market.
Wrapping up
Crypto volatility is a complex issue that attracts conflicting opinions and views. But regardless of the different theories regarding price fluctuations in the crypto market and the solutions recommended to tackle the phenomenon, volatility is and will probably continue to be a reality that crypto traders and investors will have to accept and get used to.
