Seasoned investors are no stranger to the fluctuations of the world’s stock markets, but no amount of one-day crashes could have prepared us for the wild rollercoaster ride we have seen of late in the cryptocurrency markets. Bitcoin is a good example of just how crazy things can get.
Bitcoin Flies High
In 2017, Bitcoin was flying high, hitting the heady heights of nearly $20,000. By the time we rang in a new year, Bitcoin had slumped to less than $13,000. For new cryptocurrency investors, these are tough times. Even worse, there are concerns in some quarters that the volatility of cryptocurrencies could have a knock-on effect on global financial stability, although credit agency, Standard & Poor, has dismissed such fears.
“In our opinion, in its current version, a cryptocurrency is a speculative instrument, and a collapse in its market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate,” they said.
Volatility is Inescapable
Of course, volatility is unavoidable, whatever market you are trading in. If prices were predictable, trading online would be boring. The exciting highs and lows of trading offer an intrepid investor the opportunities to make huge profits – or staggering losses.
So, why are cryptocurrencies so volatile compared to the regular stock markets – and can investors capitalise on the inherent volatility of Bitcoin, Ethereum, Litecoin, and others?
Capitalise on Knowledge
As any experienced forex trader knows, knowledge is power. It is impossible to devise successful forex trading strategies without having a thorough understanding of how the world’s financial markets operate. Stock markets are influenced by a number of factors. These include economic action in overseas markets, economic data, futures data, news articles on the internet, and political events.
Experienced investors learn how to read the markets. They examine financial reports and get to grips with technical data. Cryptocurrencies are different. Cryptocurrencies such as Bitcoin pay no heed to market indicators – they dance to their own tune.
Price fluctuations in cryptocurrency markets are driven by investor confidence and the perceived value of cryptocurrency. For example, a 2014 media report about OpenSSL vulnerabilities caused Bitcoin value to fall by 10%.
Indeed, early adoption of Bitcoin was significantly hampered by a widespread perception that Bitcoin was only used in Dark Web transactions. In recent times, news of tighter government regulation of cryptocurrencies sent Bitcoin into a tailspin, when the price dropped below $10,000. If China and other major economies make it impossible for investors to buy cryptocurrency, it loses its intrinsic value.
Despite the fluctuations and risks attached to cryptocurrencies, it is becoming increasingly obvious that cryptocurrencies are not going away. There are now Bitcoin futures derivatives, which is a strong signal that Bitcoin is now considered an asset class. Investors who don’t want to risk buying Bitcoin (or any other cryptocurrency) can limit their exposure by trading in cryptocurrency futures instead.
The key to success in any investment market is spreading your risk. Rather than investing in one or the other, diversify your portfolio. That way, if one market crashes, you are not overly exposed.