The cryptocurrency market sees unpredictable volatility which can be a challenge to investors and traders. Wild swings can happen in a matter of hours or even minutes. This offers opportunities if you understand how to use it to optimise investment decisions.

Causes of Volatility

There are a range of factors driving the price volatility seen in cryptocurrency markets.

Impact of news and events – news about regulatory changes, activity of companies in the crypto sphere, and technological innovations can cause the price of cryptocurrencies to move significantly as markets react.

The fame factor – well-known personalities making statements about crypto can have an effect on the price. For example, Elon Musk’s comments about Dogecoin have caused significant price movements.

Market psychology – increased media interest in cryptocurrency can ramp up investor emotions such as FOMO (fear of missing out) and greed. Conversely, crypto doom and gloom on social media pushes the price down. This can lead to rapid price changes.

Supply and demand – Bitcoin, the major cryptocurrency, is limited to 21 million coins, and as the circulating supply gets closer to this limit, prices are likely to climb higher. In addition, every four years the reward for mining Bitcoin is halved, and this lowers the supply of coins entering the market, increasing scarcity and pushing up the price.

Geopolitical events – Bitcoin is considered a store of value and is also used as ‘flight capital’ in times of turbulence, so wars and global disasters can affect the price.

Growing pains – Cryptocurrency is still in its infancy, so it’s still in the price discovery phase. The price will continue to fluctuate until investors and governments settle their concerns, at which point the price should stabilise.

Factors That Create Bitcoin Volatility

Supply and demand	Bitcoin’s market value is affected by the number of coins in circulation.
Investor sentiment	The crypto markets are to a large part driven by emotion. Prices can be driven by how confident investors are in the growth prospects.
Government regulations	How government’s regulate cryptocurrency affects the price of Bitcoin with rumours affecting it short-term and enactment of regulations having a long-term effect.
Media hype	News stories, influencers and industry gurus create hype which encourages prices to fluctuate.

How To Protect Against Crypto Volatility

Diversification

A key risk management strategy when investing is portfolio diversification, and this applies to cryptocurrency just as much as other asset classes.

It is important to spread investments over a wide range of cryptocurrencies, such as Bitcoin, Ethereum, and smaller altcoins. This can help secure your portfolio against unexpected market moves in one cryptocurrency.

In addition to cryptocurrency, investors should consider diversification by investing in other digital assets, such as security tokens or DeFi projects.

Research

Before investing in any cryptocurrency you should investigate it thoroughly, analysing its business model, growth potential, development team and market analysis. Projects usually have whitepapers which give detailed information about the project and this will enable you to make informed decisions about where to invest.

Risk Assessment and Management

Cryptocurrency investments carry a certain level of risks, both for the market as a whole and individual projects, which you should assess. Factors to consider include network stability, market competition, legal regulations and current trends.

Before undertaking any investment you should have a risk management strategy. This will include setting a loss limit, to determine how much you are willing to lose on an investment before exiting, and stop-loss orders, to automatically sell assets when they fall to a set price.

Similarly, take-profit orders which automatically sell when a price is reached help to lock in profits.

Timing

Buying the dip and selling the high allows investors to take advantage of market volatility.

Dollar Cost Averaging

Since it’s hard to time the market with any accuracy, an alternative strategy is not to bother trying to buy at the bottom and sell at the top – but simply to spread buys over time rather than buying a lump sum all at once. This helps mitigate the impact of short-term market volatility.

Hedging

Derivative instruments can be used as a hedge against cryptocurrency investments. For example, if you purchase Bitcoin, you could also buy a put option to serve as a hedge against a drop in its price.

Derivative instruments include options, futures, CFDs (Contract for Difference) and perpetual swaps.

Using Technical Analysis To Manage Crypto Volatility

There are various technical analysis tools that investors and traders can use to predict and manage cryptocurrency price volatility, by identifying patterns, trends and potential price movements.

Moving Averages (MAs)	Smooths out price data and helps to identify trends.
Bollinger Bands	A moving average line and two standard deviation lines which envelope the price, to help identify periods of high volatility and potential price breakouts.
Relative Strength Index (RSI)	A momentum oscillator measuring speed and change of price movements, to identify overbought or oversold conditions with a potential price reversal.
Fibonacci Retracement	Horizontal lines that indicate potential support or resistance levels, which can help to identify potential price reversals or continuation patterns.
Volume Analysis	Trading volume can provide insights into market sentiment and the strength of price movements, thus indicating the start or end of a trend.

FAQs

1. What are some of the causes of cryptocurrency volatility?

Some of the factors that influence cryptocurrency volatility are market sentiment, regulatory developments, technological advancements, and macroeconomic events.

2. What methods can investors use to protect against cryptocurrency volatility?

There are a number of strategies that can help protect against cryptocurrency volatility, including portfolio diversification, research, Dollar Cost Averaging, setting stop-loss/take-profit orders, and hedging.

3. What technical analysis tools can I use to protect against cryptocurrency volatility?

Tools such as moving averages, Bollinger Bands, RSI, Fibonacci retracement, and volume analysis can be used to aid in managing and predicting volatility.

How To Trade Cryptocurrencies With Plus500

Plus500 is a multi-asset fintech group operating trading platforms globally. Established in 2008, the firm has grown its importance as a player in the financial trading sector, being listed on the London Stock Exchange under the ticker symbol PLUS and included in the FTSE 250 Index.

Given the group’s global operations, it is regulated by several entities, including the UK’s Financial Conduct Authority (FCA), the Australian Securities and Investments Commission (ASIC), the Israel Securities Authority (ISA) and others in Europe and Asia-Pacific jurisdictions.

Regarding service offerings, Plus500 is expanding and currently offers three platforms: Plus500 Contract For Differences (CFD) with more than 2800 CFD instruments, Plus500 Invest with more than 2700 shares (available in certain countries) and Plus500 Futures, which is a futures platform available in the U.S. only.

As a trading platform, Plus500 is designed to be straightforward and accessible for beginners while offering advanced features for experienced traders. Beginner traders should use the demo account and all the resources in the Trading Academy. Traders can start with as little as $100, and Plus500 Futures (U.S.) offers a deposit bonus of up to $200.

For traders interested in cryptocurrency CFDs, Plus500 can provide up to 1:2 leverage on such transactions. Plus 500 also provides educational resources to upskill one’s trading ability and ongoing 24/7 professional support as needed.

Ready to begin your cryptocurrency trading journey? Click here to check out the Plus500 platform! *80% of retail CFD accounts lose money.

Trading in futures and options carries substantial risk of loss is not suitable for every investor. The valuation of futures and options contracts may fluctuate rapidly and unpredictably, and, as a result, clients may lose more than their original investments.

The information provided in this article is for informational purposes only and should not be construed as financial, investment, or professional advice. The views expressed are those of the author and do not necessarily reflect the opinions or recommendations of any organizations or individuals mentioned. Always consult with a qualified financial advisor or other professionals before making any financial decisions. The author and publisher are not responsible for any actions taken based on the content provided.