What Is Volatility And How To Manage It

The amount of fluctuation in the price of a particular asset within a set period of time is termed volatility. As a rule of thumb, more volatile cryptocurrency is always more dangerous to invest in but, in turn, offers the best rewards and the biggest loss potential as well. On the other hand, low volatile assets usually give out average outcomes for a longer period.

Since crypto is one of the newest asset classes currently in existence, it is still considered volatile. Once you invest in any cryptocurrency, it’ll either go up or down rather quickly, leaving you with either a big benefit or a big loss. On the other hand, stocks are considered to have mixed volatility depending on the type of stock you’re investing in.

Companies with large market caps usually have relatively stable stocks. Lastly, bonds have the lowest volatility of all the three above-mentioned assets. Their price moves up and down slowly, and they give out a small profit in the long run.

How to Measure Volatility

You can always measure volatility by analyzing historical data related to any asset. You can only predict the future volatility of an asset, and it is termed “Implied Volatility.” Although most financial tools are based on analysis of historical data and prediction of the future, the results are always at a risk of being inaccurate as no one can accurately predict the future.

The “Beta” technique is used to analyze a stock’s volatility as compared to the relevant stocks in the market. You can also take the normal average of a specific stock and see how much it usually deviates from its average.

Why is it Important to Understand Volatility?

Whenever you have to calculate any type of risk related to an investment, you have to take volatility into account. An investor always assesses the volatility of a stock or asset before investing in it. If the volatility to reward ratio is reasonable, the investor will proceed to invest in that particular asset.

If you want to reduce risk and volatility when investing, you’ll have to divide up your investment into different things within the same asset class you’re targeting. Investors are always advised to invest in a bunch of stocks rather than investing in just one stock. Investors also pair low and high-volatility investments to avoid losing too much money quickly.

When talking about investing in crypto, it is more volatile as compared to stocks. That’s because the crypto market has seen many rises and falls within the short time period of its existence.

However, crypto coins like bitcoin now have billions of dollars worth of market cap, and the recent addition of various retailers has made bitcoin less volatile as compared to other cryptocurrencies. Therefore, if you’re investing in bitcoin or any other cryptocurrency, it is better that you do the due diligence and only invests the amount you can afford to lose.

Things like yearly white papers and positive/ negative media coverage can also affect the volatility of a specific asset. More trading usually means more volatility. In some cases, a low volume of trading can also mean high volatility.

Volatility in the Crypto Market

Bitcoin is one of the latest additions to asset classes available for investment. The cryptocurrency was initially launched in 2009, and since then, it has attracted millions of investors around the globe, and its price has increased to thousands of dollars. However, since it is still a very new type of asset, its value can change by thousands of dollars within a few hours.

There are many reasons for the high volatility of bitcoin and other cryptocurrencies. The best way to see if you should invest in bitcoin right now or not is by analyzing its recent history and knowing more about the factors which introduce large changes in its value within a short period of time.

Let’s take a look at some of the most important factors which determine the volatility of bitcoin.

Actions of Investors

Like every other cryptocurrency, bitcoin has a limited supply. This is the main reason why its demand keeps on increasing every day, and supply is constantly shrinking. This is why wealthier investors buy and hold bitcoins for a long period of time, causing a continuous increase in their value. This makes it difficult for new investors to invest in bitcoin at a lower price. As bitcoin continues to be excepted by large retailers and other companies, its value will continue to increase because of its limited supply and high demand.

The volatility of bitcoin is also driven by its investors. For example, an investor who holds a significant amount of bitcoin supply cannot sell all of his bitcoins without affecting their market value. If big investors start to sell their bitcoin holdings, it will drive the price very low, and smaller investors will panic and sell the cryptocurrency as well.

To counter this problem, many exchanges have introduced specific limits on the amount of cryptocurrency you can convert into fiat currency within a single day. This prevents big investors from selling too much of their bitcoin within 24 hours and keeps them safe from huge losses.

The main reason why bitcoin holds so much value is because people think that it is a good source to store and transfer value. Many investors strongly believe that they can use bitcoin as a hedge against inflation. This way, bitcoin is being used as an alternative to gold as well.


Bitcoin regulation around the globe can also impact its value for a short period of time. Experts are still trying to calculate the exact impact a piece of bad or good news about bitcoin regulation can have on its value. If you buy and hold bitcoin, it is considered an investment tune and a store of value by many financial authorities around the globe. However, if you mine a Bitcoin, you’re required to report it as income and mention the exact price that you received it.

When countries like China started pushing to ban bitcoin mining in the country, the price of bitcoin started to drop rapidly. The price stabilized once most of the miners started to relocate and resumed their operations.

The Theory of Supply and Demand

The supply and demand theory applies to all commodities and affects bitcoin as well. The cryptocurrency’s price basically fluctuates depending on its supply and demand. There is a maximum limit of 21 million bitcoins. Therefore, as the number of bitcoins in circulation reaches closer to the maximum permissible amount, its price is expected to increase.

Once bitcoin reaches its maximum limit, the profit from mining will end. It is difficult to predict what will happen to the bitcoin market once this happens. That is because the investors with the largest bitcoin shares will control the market.

Does News Affect Bitcoin’s Price?

Just like positive and negative policies about bitcoin, news can also affect its value. Most news agencies and media outlets usually present false information just for the sake of providing content to their users. Most of the so-called facts they add to their articles are never independently reviewed by true experts.

Most of the news related to bitcoin seems to be biased. For example, a person with shares in bitcoin will definitely praise the cryptocurrency and will mention that its price will soon skyrocket.

Many people introduce and hype small cryptocurrencies to attract a large scale of investments and maximize their profits. This type of news serves to affect the market value of bitcoin and directly benefits the biggest investors. When investors try to buy the cryptocurrency in bulk, its supply plummets, and its price skyrockets.

When it comes to exchanging value between people, gold has been used for thousands of years. This is the main reason why the price, supply and demand of gold are usually very stable. The same is the case with the fiat money as well. Since the fiat money system has been around for some time, the prices of different currencies are usually predictable.

When everything is compared with bitcoin, the cryptocurrency comes out to be one of the newest additions. Since it is still making its place in the market, the price of bitcoin is expected to increase and decrease rapidly. This volatile trend might continue until a stable point can be reached.

How to Manage Volatility

There are many steps you can take to manage the volatility related to cryptocurrency in general and bitcoin in particular. Let’s take a look at some of the most important steps you can take in this regard.

Never Use Your Emotions

Whenever you are looking to invest in anything, do not let your emotions change your decisions. Most of the scammers online Try to sell your emotions rather than stating facts about the investment you are about to make.

Many new cryptocurrencies are being launched every day, and you will see so-called marketers and experts suggest that you should definitely buy a huge sum of that coin since it will be the next bitcoin. This is the time when you should leave your greed behind and should only invest in tried and tested cryptocurrencies like bitcoin.

Being emotional is one of the main causes of losing your money in the cryptocurrency marketplace, and you should definitely learn to control your emotions if you want to buy and hold bitcoin. You might lose all of your money trying to become an overnight millionaire.

The first generation of people who made millions from bitcoin had no way of predicting that bitcoin would reach the point it is at today. So, don’t try to copy them, and use logic when investing.

Hold When Necessary

Whenever you invest in any type of cryptocurrency, you will have to hold it until you are able to sell it for a higher amount than your initial buying price. So, you have to be clever enough to buy bitcoin when it depreciates in value, then sell it when it increases in value. Holding cryptocurrency is the easiest yet the most tiresome way of earning money from it.

While you are holding any cryptocurrency, you should expect to see high levels of volatility.

The price of bitcoin might start to dip right after you buy a huge amount of it. You should keep in mind that this is just a normal thing with cryptocurrencies, and you will have to wait for the right time before you can sell it for a profit.

Whenever the price of bitcoin starts to fluctuate quickly, you should try your best to stay calm and wait for the right moment to sell. This simple trick can save you lots of money in the long run. Market corrections can take a lot of time to end, and you might have to wait to receive favorable returns.

In the crypto market, everything is way faster as compared to the stock market. Price changes can take just a few minutes to affect your investment. That’s why transaction fees and other measures have been introduced to slow down market swings.

There’s a lack of protection against huge price shifts in the crypto marketplace, but again, this also makes it a perfect market for people who want to earn lots of money within a short period of time.

Before buying crypto and holding it, you should learn that price fluctuations are an essential part of any asset market, and you should wait for the right moment before making buy or sell orders. You should trust yourself and your analysis rather than panic buying or selling.

Hedging Strategies

Keeping in view the high volatility of the cryptocurrency market, many exchanges have introduced several ways of managing the volatility of this market. However, keep in mind that while using a hedge against volatility might help you manage your risk, it will definitely decrease your profit. That is because the most profitable thing in cryptocurrency is the volatility itself.

For example, you can diversify your portfolio by investing in a bunch of different well-known coins instead of just investing in bitcoin. When investing in such a way, keep in mind that you should never buy two coins whose price fluctuation is correlated.

You can also try futures trading based on the perceived future value of the cryptocurrency of your choice. Futures trading allows you to place complex bets and earn even more money. However, since the risk is very high in this type of trading, the loss is higher as well.

Smaller markets can easily be altered by big investors. So, always choose coins with huge market caps.

When compared to other assets, the crypto market is way more difficult to time. This is because the crypto market is very volatile, and price swings are always unpredictable. So, rely on your instincts, and invest as soon as possible to avoid buying at the wrong time.

Since the crypto market is very new, there are almost no set rules and fundamentals one can use to time the market. Bitcoin, in particular, is almost impossible to time. So, whenever you invest in bitcoin, never invest with all of your capital. You should keep enough money ready to buy more Bitcoin in the case of sudden dips, and you should be able to hold for long enough, even when the price is going up, to make a reasonable profit.


Diversifying has been proved to help investors manage volatility within every market. The same is the case with cryptocurrency as well. However, diversifying within the crypto marketplace is very difficult. Whenever price fluctuations start, they affect the whole market together.

By diversifying, we mean that you should never put all of your investment capital in the cryptocurrency marketplace. Rather, you should only use a portion of your larger investment fund to invest in crypto, and the rest of it can go to some other type of investment.

You should always invest in cryptocurrencies thinking of them as gambling, and that’s because of the volatility of cryptocurrency.

If you can afford to lose your investment capital, you can definitely buy a bunch of coins and hold on to them in the hopes that at least a few of them will soar in value to give you unprecedented profit.


With the crypto market consistently expanding, the number of options for investors has also doubled. However, because of the volatility of the crypto market, you should always trust the tried and tested cryptocurrencies like bitcoin and Ethereum.

In order to manage volatility, you should avoid investing and trading by using your emotions and should use your experience or guidance from a trained professional while investing.

Always diversify your investments and do not put all of your money in bitcoin. Rather, break up your investment into smaller pieces and explore other markets as well. Only invest the money you can afford to lose in crypto.

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