To say that Bitcoin has been a volatile investment would be a vast understatement. The popular cryptocurrency may be up 600% in less than a year, but there have been some wild swings along the way. In just a few days, the price of Bitcoin could fall by more than 20%, giving even long-time cryptocurrencies pause and no doubt forcing many newcomers out of the market.
If these price swings were happening in the stock market, even the most stoic investors would be heading for the exits. On Wall Street, a drop of 20% or more is defined as a bear market, and it is something to be taken very seriously. In the world of Bitcoin, a 20% drop is an almost monthly event.
So what is going on, and will the popular cryptocurrency ever settle down? No one knows for sure, and some even argue that the volatility is a good thing. There have already been predictions of $10,000, $25,000 and even a million dollars for Bitcoin, and hitting those targets will no doubt involve lots of volatility.
So if you cannot stop the volatility or get it under control, what can you do? Whether you view Bitcoin as a legitimate currency, a long-term investment or a short-term trading vehicle, there are things you can do to profit from its inherent volatility.
Change Your Trading Frequency
Many people use dollar cost averaging (DCA) to maximize their returns while minimizing their risk. The DCA strategy makes a lot of sense in volatile investments, including Bitcoin and other cryptocurrencies.
If you want to take advantage of volatility, you can change your trading frequency to profit from those wild price swings. Those who buy Bitcoin on a monthly basis may want to switch to weekly or even daily purchases. This can help investors take advantage of those price swings by smoothing out the average.
Set Mental Stops
It is normal to worry about losing money, especially with a highly volatile investment like Bitcoin. Even if you are investing with small amounts and playing with money you can afford to lose, it still hurts to see that account value go down.
You can protect yourself from Bitcoin volatility by setting mental stops – prices at which you will either sell out or buy more. You will need to be careful when acting on these mental stops, since it could cause you to sell out during a temporary price decline. Even so, this strategy can provide protection and peace of mind in an extremely volatile marketplace.
Pull Out Your Initial Investment
If you have a good run in your Bitcoin investment, why not pull out the money you originally invested? That way you are playing with house money, and you can enjoy future profits without worrying about any real losses.
If you bought $1,000 worth of Bitcoin a year ago and the price has more than doubled, pulling out that $1,000 will cost you nothing, but it will give you real peace of mind going forward. This is a popular strategy for stock market traders, and it can be just as effective for cryptocurrency investors.
Look for Patterns
If you are a numbers geek, you may be able to spot trading patterns in the price of Bitcoin and other volatile cryptocurrencies. Stock market traders have been using these kinds of charts for decades, and some cryptocurrency traders are starting to utilize the same strategies.
Identifying patterns is not an easy thing to do, and these patterns are not always evident until after the fact. Even so, there is reason to believe that some long-term patterns will emerge, and that those patterns can help savvy Bitcoin traders boost their profits.
Watch the News
The price of Bitcoin can be significantly impacted by news events, even things that happen halfway around the world. The policies of the Chinese government caused a major swoon in Bitcoin prices this year, and similar events have happened in the past.
Keeping up on the news can give you a bit of warning and prepare you for volatility ahead. Keep in mind, however, that many of these news events have already been priced in, and the 24-hour nature of Bitcoin trading can make acting on news events more difficult.
Bitcoin has been a hugely profitable investment, especially for those who got in early. Even so, the swings in the price of the popular cryptocurrency have been nothing short of frightening, and the number of investors who have ridden through all the bumps is probably pretty small. There is no reason to think that the volatility in the Bitcoin market will be going away any time soon, so the only thing you can do is find a way to profit from it.