Let’s face it, the Bitcoin world can be a little chaotic and overwhelming at times. One moment you’re up in the clouds, the next you’re free-fallin’ down a National Park-sized cliff. That, my friends, is the sweet & sour beauty of Bitcoin volatility. And even though others may be intimidated by all that change, I consider it a rare, extraordinary chance.
Think of it this way: Bitcoin's volatility isn't a bug. It's a feature. It’s what savvy investors look for in order to find big potential profits. It’s the powerful force of innovation that makes the market go, producing tidal waves of prosperity for smart surfers that are capable of shredding the curls.
Now, I don’t want to imply that this is any easy task. We can say that the Bitcoin market certainly is not for the weak of heart. But there are a lot of risks, and you need to know what they are before you start hoping on the deep end. If you are brave enough and armed with the right strategies, this volatility can actually work in your favor.
The biggest contributing factor to Bitcoin’s volatility is its history. Unlike traditional assets such as equities or commodities, Bitcoin just recently celebrated its 15th birthday. That’s because there’s very little historical data to look back on and glean insights from to predict future price movements. It's like trying to forecast the weather with only a few days' worth of records.
The second major factor increasing Bitcoin’s volatility is its extreme sensitivity to changes in market sentiment. We know that the crypto market is much more susceptible to news, social media and, quite frankly, just gossip. All it takes is a single tweet from a big name, like Elon Musk, to send the price spiking—or plummeting—at a moment’s notice. It’s a very emotional, high-speed market and you’re just not able to stay ahead of that.
Compounding this issue, Bitcoin’s price movements are very uncorrelated with traditional assets. This means that you can't rely on traditional market indicators to predict Bitcoin's price movements. It marches to its own drummer, which makes it even harder to predict.
Here’s where the opportunity is. What these factors mean are that Bitcoin is volatile, but it creates the opportunity for high returns. When the market is a bit more chaotic, it creates bigger opportunities to make the low purchase and high sale.
Here are a few strategies you should consider employing to maneuver through this market volatility and come out ahead. One of the most well-known strategies in investing is dollar-cost averaging (DCA). DCA allows you to pick a dollar amount and invest that same dollar amount every time period, no matter the price. This does a lot to mitigate the effects of short-term volatility and lowers your risk exposure.
Let’s say you finally decide it’s time to put $100 into Bitcoin each week. Some weeks, you'll buy more Bitcoin when the price is low, and other weeks, you'll buy less when the price is high. Over time, this helps average out your purchase price, meaning you’ll take on less risk buying all your Bitcoin at a peak.
A second strategy is to apply technical analysis to pinpoint future buy and sell signals. Tools like moving average crossovers and the Relative Strength Index (RSI) can help you spot trends and potential price reversals.
When a short-term moving average crosses above a long-term moving average, pay attention! This crossing might be the sign that the price has started breaking out and is ready to continue to rise. When the RSI indicates if Bitcoin is overbought, beware! If so, that may be a signal that price is about to decrease.
As with any strategy, nothing is guaranteed. The market for Bitcoin is extremely volatile, and you could lose all your money at any time. Take it from Jason, though — this is why you need to hedge your risk.
One of the easiest ways to accomplish this is by improving portfolio diversity. Take smart, calculated risks. Don’t just plan everything around one assumption or release. Invest in additional assets, like stocks, bonds, and commodities to minimize your exposure to Bitcoin’s volatility.
A third risk management technique is to employ stop-loss orders. A stop-loss order sells your Bitcoin at a set price so that if it drops to that amount, you’ll automatically sell your Bitcoin and minimize losses. Imagine putting a safety net above you and expecting it to catch you when you fall.
Less often discussed is the importance of position sizing. Aim to invest no more than 5% of your total portfolio value in Bitcoin. That way, when the price plummets, it’s not going to be a financial blow.
Looking back on my early days of investing in Bitcoin, I was scared shitless of the volatility. I find myself looking at the price a lot because I’m new, and every time it dips I would freak out. Over the years, I began to master the art of volatility and turn it to my advantage.
So I started getting on a DCA plan and I learned about technical analysis. I learned to spot the trends and potential price reversals. I learned how to better master emotions. That’s when I stopped panicking and the price went down, and began to view volatility as opportunity.
This extreme volatility is what allowed me to make my largest trading profits by betting against Bitcoin. It knew it wouldn’t be easy, but it would be off.
Now, I’m not suggesting that anybody go out there and learn to successfully trade Bitcoin. It requires the right approach, sympathy, empathy, and the ability to be a lifelong learner. I truly think that anyone can benefit from Bitcoin’s volatility if they have the right strategy, and win through discipline.
As 2023 progressed, Bitcoin’s market cap increased even as its realized volatility continued to decrease. This proves that Bitcoin is increasingly being treated as a mature asset. Early 2024 early on proved to be a different chapter of low volatility accompanying all-time high price. This means that low volatility is not necessarily a precursor to high volatility.
Whether you’re a large corporation or a small nonprofit, don’t run away from the Bitcoin ride. So welcome the volatility, get comfortable moving with it, and you’ll hopefully be rewarded by going along for the greatest ride of your lifetime.
