Cryptocurrency and volatility go hand in hand and to be frank, virtual assets are a risky investment of one's time and hard-earned money. So why are their prices so volatile and what are the ways investors minimize risk?

The first part of the question presupposes an in-depth look at how the prices of digital cash are formed, and how such an assessment differs from investments in traditional equity. With that said, let's figure it out.

Lack of Fundamental Assessment

One major substantive difference between the crypto and the usual stock market is the underlying basis of which the valuation of the asset is determined. If you were to ask a top manager of an equity fund about the ways to assess securities, they would probably be able to give you certain numbers. Factors such as earnings before interest, taxes, and depreciation, the company's debt profile, top managers, and their actions can give you some insight into the firm's future. However, this is not enough in the cryptocurrency market.

The Perspective of Regulators is constantly changing

Regulatory authorities that deal with financial policies related to cryptocurrencies are experiencing great difficulties in determining the appropriate rules for the industry. They must strike a thoughtful balance between the under and over-regulation of this sector. If controls are weak, investors may suffer from the actions of intruders. If regulators interfere too much, blockchain innovation can be quashed. The results of their caution are often seen as regulatory confusion, "gray areas" of regulation, and policy changes up to general nationwide bans.

The Reputation Has Become Stained due to Severe Cases of Fraud

It would be naive to think that there are no bad actors in the cryptocurrency space. After countless exchange hacks and fraudulent ICOs, perpetrators have unfortunately had a significant impact on the overall trustworthiness of the market. Investors always want to be sure of the security of their money. However, according to experts, this simply cannot be guaranteed.

Lack of Technological know-how

In any market, understanding investment vehicles and mechanisms provides additional confidence. This, in turn, stabilizes the asset price. However, the majority is still trying to wrap the head around what blockchain technology is. This is why many people invest in things they are not very sure about and trust those who are considered far more knowledgeable. However, trust is easy to destroy, and the asset is vulnerable to a sharp collapse as well.

Those users who don't understand the technology behind cryptocurrencies tend to panic - especially when bad news hits the market.

The Inexperience of Project Managers

Bitcoin’s whitepaper, which marked the beginning of a high-yielding alternative asset class, was published just over a decade ago. In the past two years, however, virtual currencies have become more visible to the general public. Therefore, there are very few entrepreneurs who have good experience in this industry. The lack of experience and confidence of project managers also leads to instability in the prices of digital assets.

What Is a Real Fix to the Problem of Volatility?

Hedging

Taking a walk down memory lane, Bitcoin made many investors millionaires in a matter of months in 2017. But in January 2018 it deeply disappointed holders as the price went into free-fall. This made them think in ever more serious terms about hedging.

A classic version still assumes that a person leaves the initial long position intact and holds a short position, or uses additional opportunities. At the same time, hedging is, first of all, a solution for supporters of long—term investment. This mechanism is somewhat contrary to traditional trading, where the market is dominated by speculation. Therefore, it will not be effective to use it, for example, in intraday trading.

A popular method of hedging positions involves the use of futures contracts. You can access them through official brokers. You pay a commission and open the required number of shorts. End of story.

The market of cryptocurrency derivatives is still young, although it continues to grow at a breakneck pace. The launch of new cryptocurrency derivatives exchanges gives greater opportunities for traders to earn money regardless of macroeconomic developments.

It's only a question of time before derivatives, which are popular in conventional markets, become the main product in the world of digital assets. Tools such as options, futures, and swaps allow investors to fine-tune their risk profiles.

HODL strategy

There is no better way of confronting the high volatility than to ignore it and believe in an uptrend. Now and then, investors fail to refrain from emotional and transient reactions: they sell an asset too early and suffer from losses. HODL investors often avoid these mistakes.

HODL is a long-term investment strategy that is very close to the classic Buy & Hold strategy. So called “hodlers” do not sell crypto because they believe in a significant increase in the value in the future. A person holds the asset even if they bear losses, as they believe that the global trend of exchange rates is always upward. Accordingly, the later they sell the currency, the more they will earn.

Profit is not the only motive for such players. They believe that the universal use of digital cash is just around the corner. What is more, they strive for financial independence from the traditional system.

The HODL strategy does not involve fixing losses when the market moves down or making money on price hikes. Followers of this hypothesis end up looking forward to the moment when they know for sure that the price is sufficient enough for the sale. Most Bitcoin holders are willing to sell when it reaches the $200,000 level.

Holding crypto may seem confusing and wrong. Even the best and most experienced traders often make mistakes: they cash out into fiat and buy back later, losing a lot of precious coins in the process. However, in all markets, long-term investors have thus historically been in a stronger position than those who focus on short-term benefits.

For a long-term perspective, it is strongly recommended to turn to cold wallets, for example, Ledger Nano S or Trezor. Cold storage in the context of BTC and a dizzying buffet of alternatives means storing coins offline. It is much safer and very effective. This is often a necessary security measure, especially when you store a fortune in Bitcoins.

Stablecoins

To maintain stability, we think that the backed currency to a valuable asset is the only way out. Stablecoins are digital currencies completely dependent on gold, oil, the dollar, etc. Their main difference from typical cryptocurrencies is that these are pegged to the price rate of the asset on which they depend. That’s why they call them "stable". However, the same cannot be said of ordinary virtual assets, the value of which fluctuates for a whole variety of different reasons. If you do not like to store your money in the form of a certain cryptocurrency, especially during a downtrend, you can exchange it for stablecoins. Among popular tokens linked to the US dollar are TUSD, USDT, GUSD.

In some cases, such an exchange means that your investment in crypto will temporarily not work. It is recommended to swap only for reputable stablecoins that have published the audit results. If there is no such confirmation from the audit banks, then you can hardly be 100% sure that your coins can be cashed out.

To illustrate an entirely different point, for more openness to new ideas players, volatility is a strength. They see the significant potential behind the digital currency’s rate fluctuations. They seem to have a favorable effect on active traders. It is a way to make money on both growth and the fall of the asset for them. The higher the volatility, the higher the risks, but the potential income also increases significantly.

The thing is the volatility of currencies, as well as stocks, is often of a dual-use nature. We’re talking about the economic basis, which can be described using fundamental analysis methods, and the expectations of market participants, which professionals try to guess using technical analysis methods. In the case of crypto, there are no fundamental factors, because unlike stocks, they do not give dividends, and unlike money, they are not provided with the national product of states. Even gold, although similar to digital currencies in that people have recognized it as a measure of value, is still largely consumed by the jewelry industry.

Concluding Thoughts

The market of decentralized digital money is complex. Wild fluctuations in the price of crypto make it much riskier than traditional investments. Before allocating your money in the expectation of some benefits and making a choice explore whatever is to be explored. And never invest more than you can afford to lose.