The Wild West of Markets
The reference to the “Wild West” comes from the time in American history when the western American states were without laws. This is very similar to how cryptocurrency markets are operating today. If we compare cryptocurrency markets to traditional financial markets, we see some pretty stark differences between the two. For starters, cryptocurrency markets are operating on a 24/7 basis, with no pauses, breaks, halts, or emergency stop button. Cryptocurrency are also global in nature, allowing anyone to join at any time. Basic trading requires no license, and in many cases, no verification of your identity. The assets you will find on cryptocurrency exchanges range from the digital gold of cryptocurrency (Bitcoin), to a massive array of coins you’ve never heard of.
An inherent part of the markets is the volatility. Cryptocurrency markets have become notorious for massive losses in the last decade. While this is true, losses are only half the story. The other side of the coin is the massive potential for gains. If you’re a professional trader, then you thrive on volatility, because it’s your opportunity to play the market, and turn a profit. This article explores various methods you can use to deal with the volatility that is unavoidable in cryptocurrency markets.
The acronym HODL, meaning “hold on for dear life” is perhaps the most important trading strategy a beginner investor can use to maximize profits. Although it may not be the quickest path to riches, it is certainly reliable. This article by investopedia correctly points out that the original post where HODL originated was a typo by a Bitcoin investor that didn’t know how to day trade. Since then, the method, philosophy, and strategy has been mentioned, shared, and adopted by millions of individuals.
HODLing is certainly one way to deal with volatility. What the strategy breaks down to, is “don’t worry about it, if you wait long enough, it’ll all work out”. It may be too early to tell whether or not this is true, especially for the cryptocurrency investors that entered the market in January 2018. The sentiment that goes along with HODL is the timeless phrase “Keep calm and carry on”.
Manage your emotions
The two emotions that you want to keep in check are greed or FOMO (fear of missing out), and fear or panic. Greed and FOMO happens when the market goes high all of a sudden. This could be a day where the market is up %10+, and you think now is a good time to buy because you think this is the big bull run that was promised. More often than not, a downturn will occur after a day of green on the market, which will trigger you to think you’ve made the wrong decision. This is where panic and fear set in, causing you to sell at a lower price than when you’ve entered the market. In effect, what happened to you, is what every trader has gone through at some point and time in their career. You’ve bought high, and sold low.
The trick is to manage your emotions. Set targets, goals, and rules, so that you’re trading, and investing with structure. When in doubt, fall back into the HODLing strategy, if you believe in the overall technology of cryptocurrency, then it is only a matter of time before the market recovers to a point where you’ve bought in.
Stablecoins are the cryptocurrency markets way of dealing with volatility. Stablecoins are cryptocurrency that hold their value. Typically they are pegged to a FIAT asset like the USD, or the CNY. They act as a way of entering and exiting a market position on a more volatile asset like Bitcoin or Ethereum.
Since 2017, stablecoins have become extremely popular in holding, and storing returns on trades, without exiting cryptocurrency entirely. For example, for every 10% the market rises, you could sell x% of your holdings, as to make sure you hold onto the profits no matter what. If the market goes below your sell point, you have the option to buy again at a lower price. If the market goes higher, then be happy that you’ve successfully taken a profit.
It’s important to understand, however, that you’re never going to make huge gains with stablecoins either.
Staking and Lending
Staking is when you lock up your assets, in order to earn a return on investment on the amount you’ve “staked” to the network. Many blockchain networks use staking as a method of achieving consensus on the network. As a reward for locking your coins, and participating in consensus, the network will reward you, by giving you more of the staked token.
The benefit of doing this is you’re ending up with more of the staked token, and typically get a daily, weekly, or monthly payout. So in an effort to curb volatility, if you’re increasing your stake in the asset, and progressively hold onto more and more of it, in a bad case scenario, the reward for staking will cover whatever losses you receive from market volatility. Furthermore, if you’ve locked your tokens into a staking contract, then you are forced to adopt the HODL mentality, as you cannot get rid of our tokens unless you “unstake” them which typically requires you to wait a period of time before you can regain transfer access to your tokens.
Lending is very similar, except it typically requires a centralized third party to facilitate whereas staking is done in a decentralized fashion. The company uses the money you’ve loaned them for whatever purposes they see fit. Typically they will loan it to other uses in exchange for collateral, or take the loan as the rate they’re paying you, is better than the rate they would otherwise get from a bank. This is venturing into DeFi (Decentralized Finance) territory, which is a big topic.
Parting Thoughts on Volatility
It was stated earlier in this article that the cryptocurrency markets are the wild west. This is true. These markets are not for the faint of heart. If you cannot take a 40% loss, then you won’t see the 200% gains.
It is too early to tell whether or not cryptocurrency markets will mature to the point where they gain the stability seen on traditional stock markets. Although, some things are undoubtedly here to stay. Hundreds of different coins and exchanges, free entry into the markets, global cross border trading, and 24/7/365 trading are all here to stay.
When in doubt just remember to hold on for dear life.