Becoming a cryptocurrency trader can be a challenging endeavor. After Bitcoin was launched in 2009, many currencies have followed in their footsteps and have since gone on to make a name for themselves in the industry. And while none has managed to surpass BTC, they have drawn in many traders looking to diversify their portfolios.
Bitcoin is generally understood to be the safest investment in the crypto world. Although the transactions take a little longer compared to altcoins, this is due to the extra safety measures put in place to protect your finances. BTC began its rise to popularity around 2010 and has since increased by tens of thousands of dollars, with the price habitually rising or falling thousands of dollars within days.
When you’re a trader, checking the Bitcoin price regularly helps you make sounder investment decisions. The current values of the currency should be a constant element of your trading strategy, as it helps guard your capital against significant losses.
But what exactly causes Bitcoin’s volatility, and what can you do to protect your wallet against its effects?
Price variations
While for some, it appears that Bitcoin is completely chaotic and the prices see wild fluctuations over a short amount of time for no actual reason, the truth is more complex and logical than that. The supply and demand levels are the most important aspects determining the BTC price. This is the same in the case of all other assets, so it makes sense that crypto is no exception.
By design, Bitcoin is limited to 21 million coins, and the closer the supply gets to this limit, the more the prices are likely to climb. This method is meant to mimic real-life god supplies, earning the crypto the moniker “digital gold” in trading circles. It is difficult to predict what will happen when all the Bitcoin has been mined, as this event is still far off into the future. The most believable scenario is that financial entities competing for ownership will dictate the prices, and the values will fluctuate depending on their decisions and actions.
Investor behavior is also essential for the price of crypto. The way your fellow investors carry out their ventures affects the prices at which you buy and sell and vice versa. Investors are responsible for the scarcity, or lack thereof, of Bitcoin. In the case of investors holding assets of tens of millions or more in BTC, liquidating a significant portion of their holdings would affect the overall market price. Values would plummet as investors panicked, creating an unfavorable environment for trading.
And, of course, it’s important to remember that the news has a big impact on crypto as well. Media attention towards crypto and celebrities endorsing Bitcoin have been noticed to drive demand among investors. World events, such as the possibility of an economic crisis and political or military turmoil, are also likely to cause people to want to invest in Bitcoin.
This is due to the belief that BTC can act as a store of value and therefore maintain its worth even when local currencies plummet. Moreover, since BTC operates on a decentralized network that’s not susceptible to funds freezing or crackdowns from central authorities, it appears safer in the eyes of most compared to the financial services offered by banks.
Assess your risk tolerance
Much has been said about crypto’s volatility, and while it’s fair to say that the often-extreme fluctuations are understandably enough to scare plenty of seasoned traders off, it’s not fair to swear off digital currencies altogether. To ensure that you don’t end up performing transactions you’ll end up regretting, conduct an objective assessment of the level of risk you’re comfortable with.
As a general rule, you shouldn’t invest any more than you’re comfortable losing. While it’s unlikely that you won’t face any losses during your trading, you should aim to minimize them and protect your capital as much as possible. Think about how extensive your financial buffer should be.
Generally, this will depend on your age as well as your goals. It’s also essential that you don’t make the mistake of pouring your savings into a digital currency investment, as well as the money you need to perform daily tasks. Doing so can cause you to find yourself in dire financial straits, a situation that’s best avoided, particularly in the context of the ongoing bear market.
Keep calm
Bitcoin is the type of asset where you need to develop nerves of steel before entering a trading venture. The heightened volatility offers an opportunity for significant profits. Used unwisely, however, it is an opportunity for disaster. Given that there’s a lot of scrutiny surrounding cyber money and that Bitcoin seems to become more popular daily, you’ve probably noticed a tendency towards herd-like behavior among traders.
However, these ventures are often ill-advised. As a general rule, any impulsive trading should be avoided, as you’re more likely to meet with substantial losses rather than fabulous returns. Look out for opportunities but don’t neglect to analyze the situation. If you notice that everyone around you begins to panic and act irrationally, it would be easy to emulate them.
This will probably be your first impulse, as you’ll become subconsciously worried that you’re bound to miss out on a stellar opportunity. But it’s always best to take a step back and think clearly about what’s going on. If you’ve done that and determined that the current changes in the market are worth pursuing, then you have the green light to commence trading.
The bottom line
Navigating the often-shaky waters of crypto investments can be tricky. Make sure you approach the cryptocurrency environment in a calm and realistic manner. Don’t expect it to make you fabulously wealthy overnight, and don’t become overinvested.
It’s tempting to want to reach out for each and every move in the market, but this can be very destructive for your psychological well-being. Moreover, it will also be detrimental to your funds, and since seeing revenue is likely your main reason for entering the market, you want to avoid this situation at all costs.
