How to manage crypto market volatility

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Date Published

10/30/2020

In its decade-plus of existence and growth, cryptocurrency has become known for many different things. The mining process, blockchain architecture, and countless ICOs all come to mind – but perhaps none of these are as strongly associated with crypto as its notorious volatility.

Rapid price swings have long proven to be an inherent part of the industry, leaving many feeling uneasy about getting involved in crypto mining in the first place. But is there valid reason for that?

Why is cryptocurrency so volatile?

There are a number of different factors that contribute to crypto’s historical volatility, including:

  • As a digital asset, it is more difficult to assign value to a virtual form of currency than it is to a traditional stock tied to a company, being that crypto is not backed by anything physical (with the exception of stablecoins which are backed by USD).
  • The state of the market can respond sporadically to speculation and media coverage.
  • Limited regulation can lend itself to greater market manipulation than in more traditional markets.
  • There are a limited (but growing) number of institutional investors, which typically have a buy-and-hold approach, lending stability to markets. Many crypto investors are less experienced and react more readily to market hype.

But as with any burgeoning market, there are always steps investors can take to hedge against volatility and to reduce risk in the long term.

Here are a few different strategies that can help ensure your holdings do not fall victim to crypto market volatility.

Diversification

Diversification is key in any investment portfolio as a means of hedging against risk – and crypto is no different. We have seen an increasing number of investors beginning to add cryptocurrency to their portfolios, which can have significant benefits as it is an anti-inflationary asset with an average correlation of zero – meaning it can be trusted as a diversifying vehicle.

But you should not stop there. In addition to adding crypto to your portfolio, it can also be beneficial to diversify within the digital asset class by investing in different forms of crypto. In addition to big names like bitcoin, there are also a number of altcoins and stablecoins that can provide strong opportunities for miners and investors.

Popular altcoins include:

  • Ethereum (ETH)
  • Litecoin (LTC)
  • Monero (XMR)
  • Ripple (XRP)
  • Zcash (ZEC)

What are stablecoins?

Stablecoins are a type of altcoin designed to reduce volatility by tying their values to those of existing fiat currencies. Tether is the largest stablecoin with a market cap of $16 billion, followed by USDC at $2.8 billion. Another notable stablecoin is Libra, Facebook’s startup crypto aimed at simplifying the global virtual payments process.

Dollar-cost averaging

When we think of investing, we typically think of pouring a single lump sum of money into a stock all at one time. In practice, dollar-cost averaging goes away from this by establishing investment positions of fixed dollar amounts at equal, predetermined time intervals.

Rather than investing $1,000 into a stock all at one time, you might invest $250 on the first trading day of each of the next four months. This slowly builds the position and removes the desire to try and “time the market,” i.e. trying to buy into a stock at the best possible time.

This is an effective strategy during volatile periods, and can thus always serve a worthwhile purpose when dealing in crypto. Where you might initially consider purchasing $1,000 of bitcoin at one time, you might instead decide to increment across a series of timed purchases if market volatility is a top concern.

Hodling

Hodling – which actually was born out of a misspelling of “holding” – is an investment strategy that centers on avoiding reactionary trading by instead deciding to buy and hold positions for the long haul.

Hodling as a strategy acknowledges how near-impossible it can be to really time the crypto market, and says that unless you are exceptionally skilled (or perhaps a little psychic), making quick buy and sell decisions based on market volatility is more likely to end up hurting your portfolio.

In such a volatile space, it is better to hold onto your position and endure the ups and downs, understanding that crypto prices have gone up more than they have gone down throughout their relatively brief history.

The below chart of bitcoin’s price over time helps illustrate this fact.

line graph of bitcoin price over time

Fully buying into hodling as a strategy can also help alleviate the emotional distress that can often manifest when dealing in such an unpredictable short-term market.

Stay informed

Essential steps in managing crypto volatility include:

  1. Understanding and accepting that volatility exists.
  2. Making plans and taking steps to combat it.
  3. And staying up-to-date on industry news and trends that can inform your future investment decisions.

While strategies like hodling may seem to promote a “set and forget” investment style, it is still wise to keep an ear to the ground – especially in a market in which you are financially involved.

Today on Chain is a highly useful news aggregation tool that gathers stories from many of the web’s most reputable crypto sources and compiles them in real time.

Upgrade mining hardware

As crypto prices are always changing, so too are the ways in which the coins themselves operate. Coin halvings (bitcoin, Zcash), ICOs, and institutional investment all play a role in what strategies will be most effective moving forward.

And in many cases, cryptocurrency mining hardware needs to be updated and optimized in order to keep up with network shifts.

Apart from mining hardware upgrades and optimization, managed services for blockchain can also help.

Experience the difference of truly managed services from Compute North

Compute North owns and operates state-of-the-art TIER 0™ data centers designed to make the most of blockchain technology. We offer fully managed services to ensure your operation is efficient, secure, and always up and running to its fullest potential.

Compute North’s managed services offering includes:

  • Onsite support
  • Hashrate monitoring and alerting
  • Factory firmware updates
  • Miner configuration
  • And more

Our managed blockchain services provide an end-to-end solution for miners. Using MinerSentry, our proprietary cloud-based management and monitoring platform, we enable you to be completely hands-off with maintenance and upkeep to spend more time focusing on maximizing hashrate, uptime, and revenue.

In partnering with Compute North to host your miner operations, two levels of service are available:

  • Hosting Basic is suited for those with the ability to self-manage their miners. We provide the power, network, rack space, and onsite maintenance personnel as needed, in addition to remote access to allow you to monitor and troubleshoot any issues.
  • Hosting Select is a fully managed option that enables our team to proactively support your mining operation. Support experts can handle everything from daily monitoring and troubleshooting to firmware updates and miner configuration. This option is perfect for those who prefer to be hands-off and let industry experts oversee support and optimization.

Contact us today to learn more.

Date Published

10/30/2020

Author

First Scribe

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