Ah, volatility - you either hate it or love it— no in-between.
Crypto is notorious for being volatile. Since it began with Bitcoin in the 2010s, cryptocurrency has been at the center of investor mania. Its incredibly wild price swings and infamous rallies and crashes are like climaxes of a great movie, except that this movie doesn't end in 2 hours and continues indefinitely. If you let it, crypto can always keep you on the edge of your seat (literally, because the market is open 24/7).
From Bitcoin's historic high of over $65,000 in mid-November 2021 to the shocking downfall of the Terra-UST ecosystem in May 2022 that wiped out billions of dollars worth of value in a matter of hours, there is no dull day in the Crypto markets.
With highly-publicized scandals and many cryptocurrencies losing steam in their rallies, many skeptics have published ruthless critiques. They constantly reiterate how cryptocurrencies and their projects are overhyped and impractical volatile assets with no specific functionality.
Crypto enthusiasts and skeptics alike agree that the growing industry is highly volatile.
But does that make cryptocurrency an asset or a risk?
What we get wrong about volatility
To briefly define, volatility is the measure by which the value of an asset can go up or down in a certain time frame.
Volatility can tell us a lot about an asset's story, especially concerning a fledgling industry like the blockchain. In hindsight, price movements are a good thing. Volatility provides a benchmark for price action depending on the outcome of events.
Sadly, many investors take volatility as one of the significant barriers to investing in crypto. Investors often mistakenly equate volatility with risk. Yet, volatility is not the same as risk.
Volatility is a metric that describes the degree to which prices fluctuate. On the other hand, risk is the chance of investments declining in value.
Using the two alternately will cause you to miss out on significant upswings in fear of "volatility".
Now, we wouldn't want that, do we?
Why do we fear volatility, and should we?
We fear volatility because we fear risk. And, as humans, we are biologically programmed to avoid risk.
In ancient times, we had to, or else we could end up eaten by a tiger or poisoned by an unsuspecting mushroom. Fortunately, we do not live in the wild anymore. The only jungle we know is concrete jungles. The most threatening risk we can experience is texting while driving (which is illegal anyway) or losing all our money to bad investments. Even if the risks we encounter in the modern world are scary, most don't compromise our safety.
Nonetheless, knowing this does not stop us from fearing risk anyway. Risk will always be associated with something "bad" in our ancient biological makeup. In the world of behavioral economics, this is known as "loss aversion."
Avoidance to risk when it comes to investments is understandable. However, our fear of risk can sometimes be exaggerated, especially in investing in markets wherein the downside can be controlled. Because we fear our investments might go down, we forget that they can also go up.
Fearing volatility because we fear risk then ultimately paralyzes us to do nothing.
Why we shouldn't fear volatility
You fear what you can't control. Although you can't control volatility, you can measure it. You can plan for it.
There are many ways investors measure and prepare for market volatility. If you're not up for doing advanced calculations, check the CBOE Volatility Index (VIX) and the Crypto Fear and Greed Index for a general gauge of market sentiment and thus, volatility.
Nonetheless, it is important to note you can only partially measure risk.
Risk measurements available today mainly rely on historical performance to predict future risk.The lack of certainty means bad things can happen from anywhere, anytime, and in various forms.
If you equate volatility with risk, you imply you can measure risk. That is a dangerous fallacy.
Why Volatility in Crypto is normal and why that is not a bad thing
Remarkable price fluctuations that would wreak havoc on traditional Wall Street are normal occurrences in the crypto world.
But is this volatility a trademark or a flaw?
While some criticisms of crypto hold weight, categorizing risk as a mistake shows an immense misunderstanding of the crypto industry's current state.
Here we look at reasons crypto is so volatile and why that is not such a bad thing.
1. Crypto Markets are young.
The oldest crypto, Bitcoin, is only 13 years old, and most crypto projects have existed for less than half a decade.
Like a toddler learning how to walk, the blockchain, the market, and investors are still finding their feet during this growth phase.
What this ultimately means is that crypto assets are still in price discovery. With digital assets as a new concept in the modern internet, prices fluctuate as the market tries to settle and find the fair value of these assets
2. Supply and Demand in Crypto are highly dynamic.
Supply and demand distribution also predominantly affects volatility, especially in a small market like crypto. For context, the total crypto market cap at the time of writing is just over a trillion dollars, while the total U.S. stock market is over $46 trillion.
With most crypto projects having a finite maximum supply, this creates an environment wherein sudden demand increase catapults price, increasing volatility.
The crypto markets need to mature enough to absorb these supply and demand shocks. And unlike regularized traditional markets, no circuit breakers can bail crypto assets out of significant price movements.
Crypto assets with smaller market caps are even more vulnerable to whales' movements, thus seen as riskier.
3. Crypto Projects are hard to measure.
Unlike traditional corporations that can be placed in certain sectors or categories (utilities, manufacturing, etc.), most digital assets can't be pigeonholed into traditional categories. While still in the development stage, they are hybrid and transition from one variety to another. Like startups, their value depends on the value they provide to human communities.
This lack of tangible impact makes crypto-project valuation much harder to measure.
Traditional investors may take comfort in sophisticated metrics, like a price-to-earnings ratio.
Early crypto investors do not share the same privileges.
4. Crypto markets are open 24/7.
With crypto markets open 24/7, crypto traders work with more data points than what they would do with traditional assets, potentially increasing their volatility. Crypto assets can experience wild price swings on the weekends, which stocks don't.
But the abundance of data produced in 24/7 trading is not alarming. Price swings can communicate important information about a particular crypto project's performance. When financial statements rarely date back more than five years, any extra info is welcome to an investor.
When you know how to connect the dots, more data make a more informed investment strategy.
5. Crypto is accessible and transparent.
Crypto's worldwide access, decentralized nature, and greater transparency flourish an environment that attracts innovators and con artists.
Like any market with a low barrier to entry, we see more and more crypto projects popping out of nowhere. And while numerous crypto projects are thriving, many also go bust.
What often fuels the crypto critic's fire is that scammers use the crypto world's rampant anonymity to lure naive investors into get-rich-quick projects that are ultimate shams.
Crypto's total transparency highlights both its successes and failures. And humans as we are, we flock more to the bad news and destroyed lives stemming from the blockchain, contributing to our negative perception of the fledgling technology.
Transparency - cold, hard transparency - is powerful.
Extremely dangerous is when critical information about assets is gatekept or manipulated by a small group. Take, for example, the once-beloved startup Theranos. This unicorn was valued at $9 billion despite reeking red flags.
Investors unable to see the signs were forced to watch their investments drop as Theranos' empire fell into the abyss.
When you know how to trim the fat from the meat, you can succeed in any investment, especially in new territories like crypto.
If you don't want to do the grunt work yourself, you can always opt for sophisticated crypto AI-trading engines like Peccala's.
Volatility - Not for everyone but nobody can ignore it.
Volatility is not for everyone, but the worst thing you can do is ignore it.
Sustainable success in crypto investing does not rely on volatility but instead on putting your money into legitimate projects you believe in.
Rather than on price movements, a long-term crypto investor can take inspiration from Venture capitalists when investing in startups. Look at the market-product-founder fit. Examine the crypto's technology, tokenomics, and development team. If your investment comes with an informed evaluation of the project, its people, and what it stands for, short-term volatility does not matter.
Crypto is still a developing market. We are still determining what exactly it can bring to the world. The best strategy is to buy and hold because time is on your side.
To read more on this topic:
