During periods of high volatility, investors get scared and start wondering whether they are using the right investment strategies. This is true, especially for crypto newbies, who may even be tempted to exit the market and enter it again when it feels safer. But does it ever get’ safer’ in the long run? Not really, and it’s crucial to be aware that market volatility is unavoidable. That’s simply its nature; it constantly goes up and down. And while some may be tempted to try timing the market, that’s not a good idea. Instead, what works best is to ignore short-term fluctuations and adopt a long-term mindset. This is one of the most effective ways to weather the market’s volatility, and in this blog, we’ll show you precisely how you can do that.
Understanding volatility
Volatility represents a statistical measure of the market’s tendency to rise and fall within a short time. For instance, the price of ethereum can reach an all-time high, only to crush after a while, and most of the time, that comes unexpectedly. Therefore, it’s imperative to always analyze the Ethereum price chart before investing, as this will allow you to understand the market’s current status.
Different factors lead to volatility, such as economic recession, prices of commodities and inflation, and even employment rates, although this is an indirect cause. Since volatility is inevitable once you decide to join the crypto market, this means you must look for ways to cope with it as effectively as possible. Volatility can indeed create a lot of uncertainty, making trading seem a lot more complicated. But it can also create opportunities in the long run if you arm yourself with the right knowledge and strategies.
Tips on making the most of cryptocurrencies’ volatility
The thing with volatility is that it’s a two-edged sword: while it can provide considerable gains, it can also lead to significant losses. Let’s explore what you can do to make the most of the constant price fluctuations.
Perform due diligence
Due diligence is essential regardless of the investment type, including NFTs and cryptocurrencies. Before investing in a particular token, it’s vital to check its track record and ensure it comes from a trustworthy source. Let’s say you want to invest in Bitcoin. This cryptocurrency is considered legitimate, which means it is among the safest investment options. On the other hand, something like a meme coin doesn’t offer any stability, so investing in it may not be wise. It’s the same for NFTs: if reputable companies mint them, they will likely hold up. However, this may not be the case for those put out by an unproven company (unless it has a sound value proposition).
Adopt a long-term strategy
Holding on to your assets for longer is an effective way to navigate the stormy waters of crypto. This is because it may take a while until cryptocurrencies hit a peak. Bitcoin is a good example to support this argument, as it reached its highest point after a few years since it was launched. Adopting a long-term strategy can also have positive tax implications because the IRS often regards these assets as property, which means they are subject to capital gains. So, instead of selling them only after a few months, it’s better to hold them long-term – for more than a year – and pay lower taxes. This way, you can decrease your tax exposure.
Diversify
Diversification is an old investment strategy that has proven incredibly effective in minimizing risks. You may have heard before that putting all your eggs into one basket isn’t smart. Well, it’s true – if you put all your money into a single crypto, you can easily lose everything during a market downturn. Variety, on the other hand, can help you stabilize your portfolio’s value. By spreading your investments, you can profit from the price gains of a digital asset if the price of another one is lower. Diversification also contributes to long-term financial security, allowing you to build multiple profit streams. Suppose one cryptocurrency fails; there will be others in your portfolio that you can rely on. Including various assets in your portfolio is also a great way to explore the crypto space, and discover the different use cases of cryptocurrencies, thus enjoying their maximum potential.
Transfer your assets into a trust
Using trust is a great way to preserve cryptocurrencies’ value. Once you transfer them into a trust, you can either sell or swap them out for a more stable investment. In the long run, this is an incredible strategy to preserve your wealth for different purposes, whether charitable donations or for future generations. Plus, it can protect your investments against taxation – although it has some limitations. However, setting up a trust is pretty complicated and requires a specific structure to function correctly. Hence, it is recommended to seek legal advice to ensure you get things right.
Embrace the chaos
As mentioned previously in the article, there isn’t really anything you can do to avoid volatility altogether, so you might as well embrace it! Embracing volatility means accepting that it exists and learning how to use it in your favor. Once you do so, you will be mentally prepared to deal with price fluctuations, and you’ll be more in control of your emotions. Before investing in crypto, you want to assess your risk tolerance, which will help you determine which strategy works best for you.
Suppose you aren’t comfortable with a high level of risk. In this case, a long-term investment may not be the best option. Instead, a short-term investment may suit you better, as it has a less significant impact on your finances. It’s important to stay level-headed and stick to your trading plan without getting influenced by external noise. Sure, it’s crucial to stay informed but avoid reacting to every single piece of news. Instead, keep up-to-date with actual market data, and don’t blindly follow a strategy just because someone says it works.
The bottom line
Volatility isn’t necessarily the enemy – with an effective strategy in place, you can take advantage of it and turn your investments into profits.
