Volatility is not always a bad thing even with all the buzz around and against it. It can create opportunities for losses, but it can create opportunities for profit as well if the price of the crypto goes up.
Cryptocurrencies are volatile and there is little evidence of that volatility going away anytime soon. It is a fact to live with for now. The difference in success and failure comes with your proper or improper understanding of the market and knowing how to stop losses when need be.
There are many things that contribute to cryptocurrency volatility including bad or good publicity, forecasts and project directions, market panics, perceived fluctuations in value, security problems and hacks, and many other reasons.
Here are tips on how to stop losses if you just started trading crypto.
1. Use stop loss orders
Exchanges such as Coinbase now have implemented these features. A stop loss order is a setting on a trading platform and which you activate to tell the exchange to sell a set amount of Bitcoin if the price reaches a given level that you also specify.
So when the target price is attained, the exchange starts to look for a buyer. Even if the market price was moving down quickly, you will still be able to avoid huge losses.
The bad side is that you still do not get profits if the price rises again.
You can use a buy stop order to direct the exchange to buy Bitcoin after it attains a given level.
2. Use hedging
Hedging available on some platforms will allow you to lock in the future of your cryptocurrency. In other words, you are agreeing to sell your cryptocurrency at a fixed price specified now in the future regardless of what the rates are in the future.
For instance, you could buy Bitcoin at $5,000 now and agree to sell $5,500 at the end of the month.
While it can prevent you from losses, it prevents you from gains as well since the price might be higher than $5,500 at the month end.
3. Crypto as a transmission rather than a store of value
Here, you are trying to use tools that peg the value of your crypto to dollars or some other fiat currency. For instance, if you are dealing with Bitcoin, you could search for Bitreserve, which was launched way back in 2014 by Halsey Minor the found of CNET. It mimics the function of the Bitcoin wallet while storing coins for the user, in their preferred fiat currency.
In other words, it pegs your Bitcoins to a fiat of your choice. So for instance, you could send to the wallet and peg against the dollar, and the amount is stored in the form of dollars after converting to the price on the time of deposit. It will look up for the USD price of Bitcoin and convert at the time of deposit.
After that, you can spend your BTC by converting from BTC to your chosen currency at the time of spending. Thus, the value does not depreciate. However, there is a bad side to it: if the Bitcoin price will have increased above the deposit value, you will not get the profits.
AirTM is built on top of the Uphold Connect API provided by Bitreserve. With AirTM, you can find local "cashiers" in 62 countries, including Mexico, Argentina, Venezuela, the US, and China willing to accept cash deposits.
The local cashier in the country transfers an equivalent amount of BTC to the customer giving cash. With AirTM, you can still hold the BTC in local currency and save yourself from volatility.
4. Diversify portfolio
The old saying 'don't carry your eggs in one basket' still works today. It is hard for all the cryptocurrency to have a downward movement in price at the same time, and for the long run. Although it will take some work trying to identify the various cryptocurrencies to invest and beat volatility, it still works.
5. Get smart and use advanced marketing tools
They are all over. Powered by AI or not. More or less similar to what people do in marketing. There are smart tools that can gather information and data about different digital assets from all over including social media, and come with great analytics that you can base your investment and purchase decisions on. They still will be much better to use than using none.
Don't worry. That's only the beginning of trading bots in cryptocurrencies.
6. Look at the long term benefits and hold
You might not get concerned with the daily movements in prices if you are in a long term haul. And it works because you will be able to notice quite easily when the trend is moving upward or downwards. For instance, you might notice an upward movement in the last three months and yet the daily price movements look very shaky.
Thus you can comfortably make trend judgment based on a long term analysis than a short term daily analysis that leaves you with more worries.
Unfortunately so, most of the cryptocurrency dealers today are young people with the little discipline to just buy and hold for the long run.
So getting in to ride the volatility waves on a daily or weekly basis might work great if you already understand the markets well. Otherwise, it may not. Then you might decide to hold some other part of your portfolio for the long run. If you lose the short run, you will still be in for the long run.
7. Know when to dive in
There is a reason ICOs and new forks are popular. Since volatility is part of your daily life as a crypto investor, knowing the right time to buy matters. For instance, that should be the time when the price is lowest.
On that note, there is something called market sentiment and, on top of this, there are some trends you have to live with. One is market crashes that send a lot of panic. You need to accept that these are quite normal and that they create a chance for you to buy.
Returning back to factors contributing to volatility: for instance, in many cases, it is very hard to value or determine if cryptocurrencies are overbought or oversold, or if it is overpriced or underpriced, except using market sentiments mostly in the media. This is because many startups in the space do not sell a product, earn revenue or employ thousands of people, or even return dividends, and just a tiny amount of the total value of the currency goes into evolving it.
Additionally, market manipulation contributes to volatility and which somehow discourages institutional investments. Such lack of or inadequate institutional capital makes worse volatility. Also, most of the tradable supply is not on an exchange order book but in off-exchange wallets.