Watching its price fluctuations this year, it's clear Bitcoin remains a volatile asset. If you want to reduce your exposure to Bitcoin volatility, using one or more of the following strategies will help.
Historically, Bitcoin has been a volatile asset. It continues to evolve along with the factors that influence its price, namely supply and demand, market sentiment, regulatory changes, and media hype, to name a few. The volatility of Bitcoin depends upon how much its price fluctuates compared to the average price in a period of time. In other words, it’s the standard deviation of Bitcoin’s price. Cryptocurrency market volatility brings about opportunities and risks for investors, which is why it’s paramount to understand the forces behind Bitcoin price fluctuations to make sound investment decisions.
If you want to reduce your exposure to Bitcoin volatility, use one or more of the following strategies.
Leave Your Investment Alone
The HODLing strategy can help you avoid losses from short-term volatility and gain returns from long-term value appreciation. You purchase Bitcoin and hold it for a long time, ignoring price swings and waiting for the market price of Bitcoin to increase compared to its purchase value. HODl stands for Hold on for Dear Life. If you’re a beginner, you’re not well-equipped to capture market volatility and trade Bitcoin profitably, so you’re better off investing for the long term. The HODLing strategy is much like the buy-and-hold investing strategy that is used for stocks. Instead of trading Bitcoin based on cryptocurrency market timing, you hold onto it despite any market fluctuations.
HODLing isn’t without risks. More exactly, Bitcoin and blockchain technology might not turn out to be the revolutionary innovation everyone hopes for. Equally, there are times when it’s best to sell Bitcoin, such as when you’ve gained a substantial amount. If Bitcoin has doubled from its initial price, this may be an opportunity to sell. Although it may sound simple, HODLing is actually complicated. To effectively HODL, you must grasp the importance of dollar-cost averaging, which involves investing the same amount of money at regular intervals of time. You’ll be purchasing Bitcoin during market ups and downs.
Ensure You’re Not Risking More Than You Can Afford to Lose
Losing streaks are inevitable in Bitcoin trading, even if you leverage technical analysis to identify trends and signals. If you invest more money than you can afford to lose, you’ll be pressured to sell your Bitcoin due to panic or liquidity issues. Before you start the investment journey, invest only the money you’re willing to lose so that you can focus on your long-term goals and avoid making impulsive decisions. If you invest every dime you have, you’ll lose every dime you have. As opposed to a savings account, where your money is backed by deposit insurance, the value of Bitcoin is left to the whim of the market.
Focus On Rebalancing
Focus on rebalancing on a set time basis, which can range from weekly to annually. Rebalancing means adjusting your portfolio to maintain the desired asset allocation; it involves buying and selling digital assets to ensure your portfolio maintains a specific mix of tokens. When it comes down to cryptocurrency investing, you shouldn’t put all your eggs in one basket. A cryptocurrency with a lower market cap may have growth potential, so it’s worth investigating the options available. You can look into blockchain initiatives in the United States, Europe, and Asia and make a selection based on your interests and risk appetite.
There are several rebalancing strategies you can use. For example, you can use a threshold rebalancing strategy, which requires the portfolio to be monitored daily. It’s triggered when the portfolio breaches a specific percentage of deviation from the target allocation – you can cap allocation changes at 15%. If the allocation goes beyond this point, either in the positive or negative sense, you rebalance. Another strategy you can take advantage of is calendar rebalancing, where you set a regular schedule. If you rebalance your portfolio weekly, adjust your asset allocation ahead of time.
Have A Regular Savings Plan
One of the best ways to overcome Bitcoin volatility is to avoid it altogether by staying invested and not paying attention to short-term market fluctuations. If you control important things, such as how much you save, you can balance this volatility with long-term growth. Choose a predetermined savings amount on a regular schedule, buying Bitcoin during bull runs and stacking even more when it’s for sale. A savings account is the best place to deposit your Bitcoin, offering safety and a consistent rate on the return. Not only do you get paid interest on your deposit, but you can also withdraw your funds at any time.
If you agree to lend out your Bitcoin, you can earn interest by depositing your tokens on a blockchain platform. Cryptocurrency savings accounts offer more favorable interest rates if you lock up your Bitcoin for a while. There are plenty of options to choose from, including well-established cryptocurrency exchanges; the interest rate offered will depend on the market conditions and paid out in Bitcoin. Until cryptocurrency adoption permeates, you know that your short-term needs are covered. The best savings account offers a wide range of cryptocurrencies, is easy to use, and has reasonable interest rates.
Be Calm and Avoid Irrationality
Knowing how to control your emotions can turn out to be essential while trading Bitcoin. It means the difference between success and failure. Your mental state can affect your investment decisions, so slow your breathing, avoid panic attacks, and recognize irrationality. Due to fear of missing out on possible gains, you might feel pressured to make investments – in other words, you’re tempted to buy and sell impulsively. Greed can also influence your decisions: you become committed to your Bitcoin holdings and refuse to sell, even if the time is right. You can’t solve your irrational behaviors without a trading plan.
Concluding Thoughts
Volatility is an unavoidable feature of Bitcoin and other cryptocurrencies. It goes both ways: up and down. Volatility isn’t always a bad thing, so don’t focus exclusively on the negative side of it, as it creates opportunities for profit. As you’ve been able to see, you can use various strategies to overcome Bitcoin volatility and generate returns, so you should better not waste your time.
