Protecting Crypto Investments Against Market Volatility
January 21, 2025 (Investorideas.com Newswire) The cryptocurrency sector is well known for its volatility. All investors and traders, whether professional or casual, must understand that the prices of decentralized crypto assets are unstable and, therefore, adjust their trading decisions to accommodate this instability. In some cases, this volatility is positive because it can provide traders with significant returns. On the other hand, there is no guarantee that the volatility does not negatively affect prices, a situation that could cause investors to lose most or all of their income.
While positive crypto volatility is advantageous, users must learn how to protect themselves against price plunges. The following are a few steps to be considered.
Secure Wallets and Self-Custody
Self-custody itself is not a direct protection against crypto's volatility. However, it provides users control over their cryptocurrency assets such that they can take quick action whenever necessary. In crypto, self-custody requires users to directly manage and secure their private keys without relying on any third-party services like crypto exchanges. This is valuable as it allows traders to enter and exit positions to minimize losses.
Wallet security is essential to crypto investment because investors need quick access to their funds to protect against volatility. In addition to allowing users to control their funds, the best crypto wallet also has strong security measures that protect against unauthorized access, in addition to supporting several different assets to simplify diversification.
Diversification
This is the simple process of spreading your funds across multiple cryptocurrencies to manage risk. Simply put, it is investing without putting all eggs in one basket. Diversification helps to protect against volatility because not all cryptocurrency assets will rise and fall simultaneously. Therefore, spreading funds across several coins helps to protect the general integrity of an investor's crypto portfolio.
Users should note that diversification involves more than simply picking cryptocurrencies at random; it also demands some knowledge of the industry. For instance, some assets are a lot more volatile than others, as in the case of meme coins. Investors who spread funds across highly volatile assets will likely suffer similar risks to a non-diversified portfolio because the assets are highly unstable. The best method is to acquire a combination of assets by considering multiple factors, including volatility, market value, utility, and market share.
Trading Tools
Investors use several trading tools to protect the value of their investments. These risk management tools help preserve investment decisions so that losses are as minimal as possible. One of the most popular options is the stop-loss feature, which allows investors to set a floor price during a trading session. Once set, the stop loss feature automatically closes the user's position if the price reaches the predetermined floor. The stop-loss tool is helpful, especially when dealing with highly volatile assets where a 5% change can liquidate potential profits.
There are several other risk management tools, such as take-profit orders. Like the stop-loss, this feature automatically closes a trade but uses predetermined profit levels. For instance, a trader may buy an asset for $20 and set a take-profit order at $30 such that the trade closes automatically at the set point. This helps users avoid making emotional decisions and secures accrued profits.
Understand the Cryptocurrency Market
In addition to the above methods of protecting investments, all investors need more than a basic understanding of the cryptocurrency market to make any headway. Everyone interested in the sector needs foundational knowledge at first. It is important to understand what cryptocurrencies are, how blockchain networks work, and all involved risks.
After gaining some knowledge, users must start small to understand trading platforms and gain first-hand knowledge of market volatility. This helps to minimize possible losses while gaining experience.
Understanding the cryptocurrency market involves a lot of research into specifics outside of broad industry knowledge. For instance, experienced users can identify potential scam coins more quickly than others. Experience also helps to identify altcoins that may be more speculative and are more likely to crash.
Why is Cryptocurrency Unstable?
Several factors affect the market's volatility. For instance, the industry is filled with a lot of speculation and sentiment. News stories and social media campaigns can affect the price of a coin, provoking significant volatility or crashing prices heavily. In 2021, the price of Dogecoin (DOGE) pumped more than 20% after tweets from Tesla CEO Elon Musk and billionaire businessman Mark Cuban. In addition, a strong fear of missing out (FOMO) is pervasive in the crypto sector and causes people to chase coins when prices rise, or dump them when prices plunge or swing sideways.
Another factor responsible for the crypto market's extreme volatility is liquidity. Unfortunately, some assets lack the liquidity needed to withstand market movements and seasons, which could cause prices to sink. In a market with poor liquidity, a large purchase or heavy dump can significantly affect price action.
There are also factors like regulation that make crypto unstable. Since crypto is still loosely regulated in many jurisdictions, the market struggles with stability as no laws limit industry excesses. In addition, the possibility of stringent rules enacted to disrupt the sector can periodically cause fear, uncertainty, and doubt (FUD) in the industry, causing heavy price swings.
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