Investing is always a risky business. There is no guarantee that you are going to come out ahead. There are so many factors that determine a stock’s rise or fall and many of them can come out of nowhere. A global pandemic is a good example of this.
Some investments are inherently riskier than others, however. And Bitcoin firmly falls within the risky category for many would-be investors. It is sometimes volatile and this turns some people off.
But, looking at the other side of the volatility coin, it may not be such a bad thing, depending on your perspective.
In this article, I will go over what that volatility actually means and hopefully gives you a more informed view of whether you should invest or not.
For years, people have been saying to invest in gold and silver for the eventual collapse of the US dollar. Their thinking was that value is much better stored in a fixed and stable commodity rather than a fiat currency which can be printed at will and has high possibility for inflation or deflation.
In fact, this was one of the primary reasons for creating cryptocurrency in the first place.
These days, there are many people looking to buy Bitcoin to gold and vice versa as their values rise and fall.
Just as with crypto, gold is very hard to predict. The averages fluctuate rapidly and often which makes it very difficult to forecast. And many investors want it to be more predictable. Even more volatile is silver as its troughs are far deeper and with a steeper decline.
If they were more stable, they would be a good place to park money to protect assets, but it wouldn’t be a very good investment. Returns wouldn’t be big enough to justify the investment and wealth can’t be generated by doing this.
Like traditional markets, Bitcoin now has a Volatility Index which gives a valuation on the actual rate of volatility. This number can change over time as Bitcoin stabilizes and drops or rises.
For instance, in a three month period from October 2017 to January 2018, Bitcoin’s volatility was as high as 8%.
The problem was that the value raised to astronomical heights in the fall and winter before the end of 2017 in which it reached almost $20,000 in value. Then in January, there was a huge sell off so it dropped all the way down to under $10,000.
That sounds quite dramatic, and it was if you had bought in December at its height. What has to be kept in mind is that just a couple of years earlier, in January 2016 at its highest point for the month it was valued at a little over $400.
Even at its lowest point in January 2018, it was still orders of magnitude higher than just a couple of years earlier.
Yes, it is volatile, but that means that many investors saw a return that would have been unheard of in any other investment. Not even gold could give a return this high even as volatile as it is.
Speculators love volatility. Buy low, sell high, right? Well, with a commodity that has such steep troughs and wild gains can make somebody a fortune overnight.
This is the value that many investors are looking for. There is another factor besides the volatility that is where the real value is for a speculator. As I mentioned in the earlier section, even when Bitcoin crashed hard in January 2018, it was still more than 10 times the value it had two years earlier. And it did keep falling. Over time it ended up down to a low of under $4,000. And at the time of this writing it is back up to over $8,000.
What this means is that it does still hold value. If you buy low and are not able to sell high and it does crash, you just have to be patient. At some point it will rise again as it always has historically. The volatility makes it hard to predict so selling at the peak is very difficult. If you miss your chance initially, it will happen again at a later point.
HODL (Holding On For Dear Life) is a viable strategy if you want to speculate in Bitcoin as it does actually hold value over the long term. Those dips are always temporary.
One of the biggest differentiating factors between cryptocurrency and fiat is that there was an intentional limiting of supply from its onset. Bitcoin set out with a finite number of coins that would be mined and when they are all created there will be no more. Fiat on the other hand can be printed whenever which manipulates interest rates to either encourage or discourage lending to suit whatever the central bank thinks is the best strategy for the economy.
Because of this, there is volatility and scarcity so the demand stays with it. It ebbs and flows as the value increases and decreases, but since it has scarcity, it is always an option for investors.
Short term trading of Bitcoin is very tricky and extremely risky. Trying to predict when a peak or valley will happen is next to impossible. Some traders try to work in minutes and hours and Bitcoin is not well suited for this. Especially since transactions happen quickly.
Day traders likewise have issues as any peaks can be short lived and fall quickly if people unload their coins feeling that this may be the peak.
You have to have nerves of steel and money to burn to be a successful day trader of Bitcoin. It’s these drops and crashes that get the most publicity, but traders understand that if they hold, they can likely make money.
This article is written for information purpose only, and links are for reference. If you use any of the websites for any kind of transaction, it should be your own decision. The Author and this blog are not responsible for anything! We advise you to do proper research before doing any transactions.