The term ‘volatility’ is the extent to which the price of a financial asset fluctuates over a period of time. In cryptocurrencies, volatility is much higher than in traditional financial markets, meaning that prices can rise or fall significantly in a short time. For example, bitcoin, considered “digital gold”, can have price swings of more than 10% in a single day. This attracts both investors interested in quick gains and caution from those looking to minimize risk.
Why are cryptocurrencies so volatile?
Several reasons contribute to this high volatility in the crypto market, and understanding them can help you make more informed decisions:
1. Lack of strict regulation
The cryptocurrency market is less regulated compared to traditional stock or bond markets. This freedom leaves room for large speculation and price manipulation, which contributes to massive fluctuations.
2. Adoption and industry news
Widespread adoption or an unexpected statement from a public figure (such as Elon Musk) can cause rapid price changes. For example, announcements about accepting Bitcoin as a payment method can propel its value upwards.
3. Low liquidity in some cases
The crypto market, although growing, has relatively low liquidity compared to other financial markets. This means that large transactions can significantly influence the price of an asset.
4. Investor speculation
Retail investors and crypto whales (holders of large amounts) often speculate on prices, leading to sudden and unexpected changes.
5. Emerging technology
Blockchain and cryptocurrencies are new technologies that continue to develop. Each technological update or technical issue can affect market optimism or pessimism, generating volatility.
How do we manage volatility?
While volatility may seem daunting, there are some simple strategies you can use to protect yourself and even benefit from price fluctuations:
1. Invest only what you can afford to lose
This is one of the golden rules in crypto investing. Never put vital savings or emergency funds at stake. Cryptocurrencies can bring gains, but the risks are just as high.
2. Diversify your portfolio
Don’t invest all your funds in one cryptocurrency. Diversification reduces risk, with other assets in your portfolio more likely to offset the losses of a fluctuating asset.
3. Use stop-loss orders
If you trade actively, stop-loss orders help you limit your losses when prices fall below a certain threshold.
4. Set a long-term strategy
Avoid the temptation to react impulsively to short price changes. A long-term strategy is based on fundamental analysis, confident in the value of a project.
5. Use simple and secure platforms
Platforms like Abarai offer the ability to buy and sell cryptocurrencies quickly, without the hassle of complicated regulations. The lack of complicated procedures (like unnecessary KYC for small amounts) makes your experience friendly and accessible. For an in-depth understanding of the term volatility, we recommend reading our detailed article: Crypto Market Volatility: How to take advantage of price fluctuations and protect your investments.
Volatility: pros and cons
Advantages
- Quick profit opportunities: Skilled investors can take advantage of significant price fluctuations.
- 24-hour markets: The crypto market operates 24/7, offering flexibility.
- Increased adoption can lead to massive long-term appreciation.
Disadvantages
- High financial risk: Sudden changes can bring major losses.
- Emotional stress for investors constantly watching prices.
- Lack of regulation can lead to security issues or fraud.
Investing in crypto is not just about choosing coins. It requires an understanding of the market and the risks involved. Participating in dedicated communities, following industry news, and utilizing platforms that offer education and support can make a major difference.
Have a favorite cryptocurrency you’d like to add to your investment portfolio? You can find an up-to-date price by visiting our dedicated cryptocurrency price list page.