Crypto Volatility — a trader’s paradise but an investor’s nightmare

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A trader’s paradise but an investor’s nightmare. In essence, volatility can be broken down into two things — A measure of human emotions (FOMO buy and panic selling) and lack of liquidity.

Human Emotions: We all know that humans are fickle-minded creatures. I am certainly one. Watching something go up green can induce FOMO buying. Watching something keep dropping can cause us to panic sell. It’s a snowball effect. We had a massive run-up in Dec/Jan purely from FOMO-buying by retail investors. Similar to June 2017 when most altcoins (at that time) printed their ATHs.

Emotions are the main driver of markets. It is a constant push and pull from those who entered early and are selling for profit, and those who entered later buying the bags of early adopters. Third law of Economics: Supply and Demand.

Lack of liquidity: This basically means, $1 million dollars can cause massive spikes in low-cap coins. $1 Billion Dollars can shift market sentiments in Bitcoin, the market gauge of the crypto-market. As compared to the stock market where it will require billions and billions to move it by a few percentage.

Why traders love volatility? Especially in Cryptocurrencies which is infamous for its volatility. With the right setup and TA skills, traders can easily make good money by swing-trading altcoins or Bitcoin on leverage. All they need is three things: macro trend (bull or bear), major support and resistance, and a high probability setup with proper risk management (stop-losses, R:R). Traders play the short-term game.

Why Investors hate volatility? Pure Investors only care about one thing- Assets going up, making profits. So what happens when that asset keeps dropping? Thoughts, prediction enter the mind- “do I cut my losses, do I hold on, but this guy says to hold on, that guy says its going to fall.” Also true, if the asset keeps going up, we will have thoughts like: “MOON! This is going up forever. No way it will drop now.” Volatility can induce more volatility until it reaches a tipping point. Investors are playing the long-term game.

So are there ways to counter this?

Unfortunately, to counter volatility as an investor, is NOT easy. The level of difficulty varies depending on your entry. The lower your entry, the easier the game is.

[1] — HODL through volatility Yes yes the main words HODL. Volatility as mentioned above is a measure of emotions. We constantly hear people saying “don’t trade with emotions” etc. True enough, the one strong defence over volatility is to HODL and ignore it. Watching charts everyday can affect your decisions especially to new investors who do not understand technical analysis and how the market works. Stick to your FA guns, the very reason you invest in the first place (not the ‘I want to make money’ reason), and focus on long-term! Long-term here means years. By holding (and standing by it) through volatility, you eliminate over-trading and emotional trading.

[2] — Technical Analysis “TA does not work in Crypto”. Very true but we have to understand why that is. Remember I mentioned why traders love volatility? These ‘traders’ can be whales and manipulators. They have bots, TA experts and FUD machines to move markets. They would make more money than HODLing (they, of course, also hold some for long-term). And plus, is it not funny that everyone here is an investor and holding Bitcoin long-term but the price keeps dropping? So who is selling? The traders of course. And how do traders determine the ‘best price’ to sell? By using technical analysis of course! By ensuring you enter at the right prices, you eliminate emotions from volatility which makes it easier to HODL

Understanding how TA works and applying its theories in the crypto market is essential. Hopefully, during my 1-month stint in this group, I will be able to share my trading/investing philosophies on how I determine my entry points that prepare us for the long term game.

“Be a lazy investor — buy and forget. Change channels. Turn the show off.” ~ Richard Thaler.

The statement explains [1]. It is that simple but in order to not go crazy, we need to have [2] to determine a good entry.

Have a good day folks! Hope this helps somehow. Stay safe!!

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Iliya Zaki is the Community Manager of Chainfund.

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Crypto Volatility — a trader’s paradise but an investor’s nightmare was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.

Publication date: 
09/13/2018 - 09:16

The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.