Blockchain has been a reagent for possibilities in the field of technology. It gave rise to cryptocurrencies of the world. In the near future, these are very likely to be legal tenders around the globe. The last few years have seen an exponential rise in the market capitalisation of certain cryptocurrencies like Bitcoin, Ethereum, Litecoin, Dogecoin, etc. Since cryptocurrency is very well known to people and is widely traded in the capital markets, the market value for most of them is highly volatile. And it becomes very crucial for its traders to mitigate the risk of volatility. One of the better ways to understand risk mitigation is by undertaking a cryptocurrency course.
Meanwhile, for a brief understanding, let us discuss three ways to mitigate cryptocurrency volatility risks:
- Since Bitcoin does not have an intrinsic value, it means that the market for such currencies is speculative only. It is very likely that a bubble is being created, which may burst anytime in the future. Hence, diversification could be an option to save you from the event of a bubble burst. If you have not placed all your funds in one basket, you decrease the probability of losing it all in a time of crisis.
It would be an unreasonably aggressive investment when you place all your funds in speculative tools. In order to mitigate the risks associated with the financial tool not having an intrinsic value, the investor could opt for tax-free bonds. A well-balanced bond-crypto portfolio could be created with funds in each basket, very similar to a distribution of funds in bonds and equity.
- One can take advantage of the price volatility with a proper understanding of how much you can lose in the process. In this scenario, a technical trader would be a great help. Since the market is speculative and volatile, technical analysis would reveal information that might not be directly visible to untrained human eyes. This would ultimately help you take calculated risks, which means you would not lose more than you are willing to or more than you can endure.
It keeps your emotions in check when you are dealing with an unpredictable financial tool. And you can always base your decisions on sound data analysis.
- Last but not least, do not follow a herd. As mentioned earlier, most of the participants are speculators and not investors, so you need to refrain from buying or selling because others are doing so. This is how bubbles are created and once you invest at an extremely inflated price, the risk associated with the investment magnifies.
There are two groups of people in the capital market, the ones who lose money and the ones who earn profits from losers. A distinct approach would take you away from herds and then only your profits would be bigger.
A disciplined investor will ultimately defeat a speculator. Therefore, diversifying, keeping your emotions in check, and not following the herd are the basics to mitigate the risks associated with the volatility of cryptocurrency.