The Secret to Surviving Crypto Volatility Is One You Already Know

Oct, 2022

The recent volatility in the cryptocurrency market has some investors understandably on edge. And it’s really no surprise – newer concepts and its associated changes often feel uncertain. Especially in light of record inflation that’s driving volatility in traditional markets, investors are smart to be cautious.

But hear me out: This isn’t new. We’ve seen this all before. 

When the U.S. dropped the gold standard for currency, what we now know as money essentially became “a socially accepted standard” by which things are priced and that facilitates transactions. The value of our money – like the value of cryptocurrency – is intangible until it’s converted to something of value through purchase. In other words, the bills and coins we trust as currency have value simply because we say they do, and because we accept them as “value” in exchange for tangible goods and services.

And that trust took time to build. In the first currency system, because it wasn’t a tangible good, people had to place faith in the issuing institution that it held its stated value.

Not to mention, our currency is itself volatile, subject to changes in inflation, and its value is based on the market for the item at hand. For example, if bread is in high demand, its cost might increase to $5 instead of $3 – those associated dollars have declined in their relative value. It takes more currency to purchase the same goods.

The stock market is no different. The value of stocks is set by demand in the market, which means it too is subject to erratic swings and volatility. The earliest stock market crash in the 1700s happened in Amsterdam when shareholders of the Dutch East India Company tried to sell off in a panic. Except nobody was buying. Both sellers and buyers believed the shares had no “value.”

Fast forward almost two centuries and the same thing happened in the U.S. market in 1929, with a subsequent crash in 1987, the dotcom bust of 2002 and the mortgage market debacle in 2008. All of these took a major toll on the U.S. and global economy, and while casual investors may have initially lost faith in the market after each episode, professionals understand there’s inherent value in this system of buying and selling securities, and so it perseveres. Now, as inflation drives continued stock market volatility, investors are cautious, but no one is questioning the survival of the system. 

The advent of digital/mobile payments has also suffered similar trust issues by virtue of being new and unknown. PayPal, Venmo, Apple Pay, etc., have all battled uncertainty and skepticism, and it took time to build user trust and adoption. Now, many of us can’t function without them. 

NOTE:  This is in reference to the above 2 paragraphs:  Markets occur when people have different opinions of “value”.  Crashes occur when people have the same opinion that something is of no or little value.

While most of the attention around cryptocurrency is focused on the risk, it also offers tremendous reward. Not only is there potential high yields for investors, but it’s democratizing finance, providing access to financial tools for people who otherwise wouldn’t have it in traditional banking deserts. 

Just as the currency, stock market and mobile payments systems we know today have become essential for powering the economy, so too will crypto, by expanding access to finance on a global scale with tokens that hold global value – insulated from inflation and exchange rates. For that reason, cryptocurrency is powering truly global commerce for everyone from the high-stakes investor to the marginalized individuals in developing countries.

The fact that we’ve seen this all before means we know what to do to navigate crypto volatility: Don’t panic. Be patient. Watch the patterns. Decide your “value” threshold.

The crypto market, like every other form of exchange or industry for that matter, is subject to rather predictable business cycles. Most business cycles are around five to seven years – the market goes through consolidation, prices drop, it crashes, investors calm down and eventually start buying again. This is nothing new. There are boom and bust cycles in the airlines, manufacturing and even the weight loss industry. 

However, there are mechanisms in place to prevent self-destruction. In 1929, banks froze assets and set limits on withdrawals to stop the panic, and OPEC tapped into strategic oil reserves to stave off a fuel market crash. So, when Celsius froze customers’ assets to prevent a Bitcoin meltdown or when Bitcoin halved to counteract inflation by maintaining scarcity, these were strategic moves designed to normalize the market.

The difference is crypto moves at a much faster pace compared to typical markets and businesses, on a 12–18-month cycle. This business cycle compression makes it feel much more volatile. We easily forget what happened five to seven years ago, but we don’t forget in 12-18 months. If you were to stretch the Bitcoin cycle out to the same five to seven-year timespan as a typical market cycle, it would look nearly the same, with the same driving forces and the same checks and balances at work.

What does that mean for investors? How can we get comfortable with crypto? The same way we have in every other market: Watch for patterns, learn the cycles and use them to our advantage. If we know Nasdaq is down in January but peaks in the spring, trading is slow on Fridays and is dead in August, we’d play those patterns to our advantage. Crypto is no different: Don’t oversell when it’s high but do pump the brakes when it’s in a down cycle and prepare to buy more and get ready for the upswing. 

As the economy stabilizes, we’ll see supply prices level out, a bit more consumer spending, oil prices will come down and other markets will improve. All of these will allow investors to take on a bit more risk in the crypto market. We know bitcoin prices surge about six months after a halving event, and with one coming up in 2024, we should be watching the patterns now so we’re prepared and know what to do.

Ultimately, the secret to building trust in the crypto market is one you already know: Watch for the patterns, learn the cycles and invest accordingly.