Tips for staying in such a volatile market

Many of us call the crypto market a risky and volatile market. The size of the crypto industry, measured by the market value of all coins, crossed the $1 trillion mark for the first time in January 2021 and peaked at nearly $3 trillion. in November 2021. Currently, it is $1.27 trillion as of May 20, 2022. This industry has significant volatility. Sustaining in such a market requires a different set of skills.

As the industry is at a very nascent stage of development, higher volatility is a common occurrence at this stage of growth. However, the number of crypto users is almost 300 million, and per capita crypto holding is currently less than $5. Despite being in a very nascent stage, this market has a much higher trading speed, measured by trading volume divided by market capitalization, compared to the stock market – more than seven in crypto compared to less than two in shares. The reason for this is the large trading volume via automated trading. Much of the asset is managed electronically (via robots with user-defined trading range, target profit and loss criteria, etc.)

Value of global equity trading worldwide from 1st quarter 2017 to 3rd quarter 2021(in billions of US dollars)While volatility is very good for a class of market participants as it provides them with opportunities to make money, for many it can provide opportunities to hone their portfolio skills.

As we all know, the basis of investing is to understand the underlying and the instrument. It is equally important to understand risk capacity and appetite; as a general rule, we should choose the lesser of the two.

Volatility is a time-sensitive phenomenon and therefore a longer holding period reduces actual volatility and risk. You may have heard many times that; the BUY and HOLD strategy is suitable for investors. Here they generally refer to investment as a long-term holding of underlying assets.

For cryptocurrency, one must research and find the source of value of a cryptocurrency or crypto asset. A coin or token derives its value from the efficiency of its blockchain and its use cases. Understanding the value chain and sustainability of the claim makes it a lasting asset. Most often, we tend to ignore or minimize the role of blockchain technology. Realizing that blockchain technology will change the face and pace of every industry will make an individual a better decision maker, both in the crypto or conventional asset space.

Given the complexity of managing volatile assets, several asset management companies offer their services to manage crypto portfolios – both actively and passively managed portfolios. However, passive wallet seems to have an advantage over active management in the case of crypto. For example, if one had managed his portfolio around the IC15 (Cryptocurrency Index), the result would have been better, given the risk-reward ratio.

Generally, an investor becomes myopic and becomes trapped in the noise of the market or the street. Crypto investors are no different. Being focused on the goal allows an investor to stray less and keeps them firm in their decisions. It also helps to diversify the investment within the asset class. However, choosing a coin or token is rigorous due to the number of options available. Fortunately, this industry has an abundance of information available and it just takes a little caution to pick an exposure backed by strong fundamentals. However, falling prey to ill-intentioned schemes is common like other asset classes – be it stocks, real estate or elsewhere.

Diversification within the asset class as well as across the asset class generally reduces these risks as well as other systemic and idiosyncratic risks. An article from a reputable magazine tries to find an answer through five experts on the quantum of the overall portfolio to invest in risky assets like crypto; the experts give their opinion within a range of up to 5%. According to the advice of the grandmother, one should not invest in a risky asset that one can afford to lose. However, modern investment studies suggest keeping leverage under control all the time.

The crypto industry offers handsome returns for long-term investors or crypto holders in terms of lending and staking income in which their assets work for them, rather than gathering dust in wallets.

Since the crypto market shares almost similar products with stock markets, portfolio concepts, such as ETFs and hedge funds, etc. are available to investors in global markets.



The opinions expressed above are those of the author.


About Ellie Cohn

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