Cryptocurrencies, such as Bitcoin, are well known for significant price swings over short periods of time. These events turn many investors away because they think these volatilities pose a risk to potential investments. But should this high volatility always be seen from a negative point of view?
- What is the volatility of an asset?
- How is volatility related to risk?
- What factors influence Bitcoin price variation?
- How to protect against Bitcoin volatility?
1. What is the volatility of an asset?
An asset has high volatility when the price range in which it is traded is too large. For example, if the unit of a currency costs $ 100 and throughout the day it varies between $ 95 and $ 105, we have a 5% fluctuation, both up and down. low. Of course this is quite intense volatility, but in Bitcoin’s history of quotes we can find days with highs and lows of 10%, 15%, 20%, 25% and even more.
As much as price fluctuations above 1% may scare some traders, especially those who are accustomed to the modest returns on traditional investments, we must understand that Bitcoin’s expressive price movement is one of its peculiarities, which is not necessarily a negative attribute.
2. How is volatility related to risk?
In a simplified definition, the risk is nothing more than the likelihood that something unwanted will happen. When driving a car, we want to get from one point to another safely, even though there is a risk of collision with other cars.
When buying a certain value in Bitcoins, the logic is quite similar. We expect to get a return on your valuation, but we accept the risk that the price of the cryptocurrency may be below the entry value.
The point is that the more volatile an asset is, the greater the risk that price movement will go against you. At the same time, those who want to make significant gains must tolerate this risk and assess whether it pays off.
Remember that people acquire Bitcoin with the most diverse goals. Some use it as a currency to buy products or hire services; There are those who prefer to speculate, trading to profit as it increases in value, and there are also those who do arbitrage operations, taking advantage of price differences between exchanges.
In addition, cryptocurrency has gained prominence as a value reserve mechanism. This means that it can serve as a protection of your equity when traditional currencies lose value – especially in times of crisis.
The reasoning behind this strategy is as follows: The Bitcoin protocol states that the number of units in circulation will not exceed 21 million. With this aspect of scarcity, the purchasing power of cryptocurrency will tend to increase over time.
These properties are very similar to the characteristics of precious metals like gold. Unlike fiat currency, which can be issued without limits, increasing its supply in the market and generating a potential devaluation, the amount of gold available in nature is limited.
No wonder Bitcoin became so popular and is known as digital gold.
3. What factors influence Bitcoin price variation?
As a digital asset, it is very difficult to determine a fair price for Bitcoin. The intrinsic value of the asset is more related to its ability to revolutionize the financial system and influence the adoption of technologies such as Blockchain.
In addition, one must take note that this market is still in its early stages compared to its grand possibilities. Thus, with a significantly small amount of capital, it is already possible to move the price a lot – within a specific exchange, at least.
- Government regulations or prohibitions on digital currencies
- Development of new Bitcoin network features and optimizations
- Quality of work and reputation of developers involved with the project
- Occurrences of attacks on exchanges around the world
- Creation of new forks, as was the split between Bitcoin and Bitcoin Cash
- Introduction of new altcoins
4. How to protect against Bitcoin volatility?
Given the intense volatility of this market, it is important to study how the price movement has been in recent days – and even in previous weeks – to avoid inputs at times when the indications of a fall in price levels are greater than the chances of rising. Understanding technical analysis, even the basics, is essential in this regard.
Also, knowing how the order book works and the types of buy and sell orders is another key element to consider. Without it, you will probably trade bitcoins at a price far from what you would like, putting volatility against you.
We also need to find ways to protect our capital from variations that could result in greater losses than we are willing to lose. To do this, we use the stop-loss order to exit the trade when the price reaches a level where you think it is better to stop losses than to risk becoming even more negative.
Remember that not all exchanges offer a stop-loss function. So make sure yours has this feature available. Otherwise, it is ideal to switch to a better broker, so as not to take unnecessary risks.
So do not let the intense movements be a barrier to acquire cryptocurrency. As we have seen, Bitcoin volatility can be favorable if we have well-defined objectives and understand the best protection techniques.
Did you like this article? So take the time to answer your questions about the rules for crypto in some countries. Check out our publication about the legality of Bitcoin!