For some investors, cryptocurrency is a long-term hold and a store of value. It’s also seen by some as a way to play the market and potentially make a huge profit. For others, it’s merely an alternative investment that’s a worthy, if small addition to a well-diversified portfolio of financial assets.
No matter your philosophy on crypto or your approach to investing in it, you can recognize that crypto markets tend to get bumpy during periods of economic tumult.
So, what steps can you take to safeguard your crypto investments in a volatile economy?
The Volatile Economy
Economic volatility is a complicated subject, since people can define “volatility” in different ways – and it can influence markets in unpredictable ways. Mergers and acquisitions activity, political changes, international dynamics, cultural issues, and sudden increases in investor optimism or pessimism can all lead to a cascade of events that make the crypto market (along with the stock market, the real estate market, and other markets) into chaos.
Volatility isn’t necessarily a good thing or bad thing for investors; it’s simply a set of conditions defined by instability and unpredictability. While these are conditions that fill many investors with uncertainty, dread, or negativity, other investors see it as an opportunity.
Still, if you want to preserve the value of your investments, insulate yourself from that volatility, and secure more stable returns, it’s important to have a plan for addressing the volatile economy.
Why Crypto Is Especially Vulnerable
Economics is a complex topic, and many sectors of the economy are inextricably intertwined; when there’s significant volatility in one area of the economy, other areas tend to be affected in similar ways.
The crypto world is especially vulnerable to volatility, and for a few main reasons:
Speculators
Crypto speculation has died down a bit, but there are still millions of investors who only see the crypto market as a game, a gambling machine, or a get rich quick scheme. These people buy and sell coins rapidly in a bid to make as much short-term profit as possible – and collectively, their activity tends to have an explosive effect on crypto prices. These volatility-inspiring actions can become self-perpetuating, too; when millions of people decide to buy into a cryptocurrency, they push the price higher. Then, when other speculators see the price rising, they may be more likely to perceive upward momentum, spurring them to buy more, and so on. This kind of speculative effect is mitigated in other markets by high trading volume, derivative products, and even market circuit breakers, but in the crypto world, it has a rawer effect.
Uncertainty
Volatility is relative, as it’s typically compared to normal conditions with historical precedent. But in the crypto world, there isn’t much historical precedent to go on. People are uncertain about what exactly crypto is in the broader scope of economics, and there isn’t a clear consensus for the future of this type of currency. Accordingly, when people are affected by economic volatility, they become especially focused on crypto – and this includes both optimists and pessimists, pushing and pulling to make crypto even more chaotic.
Demand for Liquidity
Additionally, during volatile economic times, savvy investors often seek refuge in time tested, reliable assets. For many investors, cash is king. Crypto investments are sometimes seen as expendable. As such, people are often willing to sell their holdings to fund other asset purchases or simply maintain some cash on hand.
How to Safeguard Your Crypto Investments in a Volatile Economy
So, what steps can you take to safeguard your crypto investments if the economy is volatile?
Identify and objectively measure volatility indicators.
It’s a good idea to proactively identify and objectively measure volatility indicators that you feel are important. There are multiple volatility indexes that can help you measure the relative volatility of certain markets. You can also look to historical prices, trading volume, and other factors to help you decide whether current conditions qualify as volatile. This is somewhat subjective, so it’s important for you to set your own benchmarks.
Switch to a cold wallet.
A crypto “cold wallet” is a secure place to keep your crypto, separate from most mainstream exchanges. For example, you might keep your cold crypto in a basic flash drive. While this isn’t going to have much of an impact on crypto volatility, it’s a nice psychological trick to keep you from constantly checking the price of your holdings. And, it might help prevent you from buying or selling impulsively. On top of that, there are massive privacy and security advantages to cold wallets.
Choose your exchanges carefully.
If you do decide to use crypto exchanges, choose those exchanges carefully. Pick an exchange with low transaction fees, full transparency, intuitive functionality, and plenty of information. This way, you can successfully do your due diligence.
Plan for the long term.
The best way to think about crypto is to see it as a long-term play. There’s nothing wrong with engaging in a market as a speculator, but this is an inherently risky activity. Volatility doesn’t have much of an impact on your investing strategy if you make all your moves with a 30- or 40-year time horizon.
Consider different coins.
Bitcoin is by far the most popular cryptocurrency, but it’s certainly not the only one. And in many ways, it falls short compared to some of its close competitors. Crypto markets do share some DNA, so volatility with one coin may have an impact on other coins. But you can insulate your portfolio against at least some volatility by getting exposure to different types of coins.
Practice dollar cost averaging (DCA).
Dollar cost averaging (DCA) is the practice of buying a fixed amount of an asset at regular intervals, thus mitigating the impact of volatility. If you buy a large quantity of an asset all at once, you run the risk of buying at a price that’s too high. If you buy the same amount of the assets every month, eventually your entry point will average out to be acceptable. This is still the case no matter how volatile the markets are in the meantime.
Stay up to date.
Volatility is usually a byproduct of meaningful economic events. You can reasonably predict potential changes in crypto volatility by carefully reading the news and taking action when you suspect forthcoming changes.
The Importance of Diversification
Arguably the most important strategy for protecting yourself against any form of economic volatility is diversification. Diversification is about distributing your holdings and balancing your overall portfolio to insulate yourself from unexpected changes in any one area.
For example:
Investments
Diversifying your investments means holding many different types of assets. This could mean holding things like stocks, ETFs, bonds, real estate, and alternative investments in addition to crypto. This way, if the crypto market becomes totally unpredictable, you’ll have plenty of assets to keep your portfolio grounded.
Currencies
You can also think about diversifying your currency holdings. If you’re like most investors, most of your holdings are in USD, with some in various cryptocurrencies. But what about other foreign currencies? And how many different cryptocurrencies are you currently holding?
Streams of Income
It’s also a good idea to diversify your streams of income, especially if you’re nearing retirement or are in retirement. If you have a part-time job, dividends from stocks, passive income from rental properties, and a side business, economic volatility is unlikely to have a massive impact on your income.
Economic volatility is an inescapable reality, though it’s usually a temporary one. In today’s era of rapidly changing technology, cultural fragmentation, and looming uncertainty, the overall market does seem more volatile than usual. But if you’re willing to enact some protective measures, and change your strategies slightly, you may not only survive, but thrive amidst these volatile conditions.
Featured Image Credit: Photo by Alesia Kozik; Pexels; Thank you.
