What New Crypto Owners Should Understand About Volatility

Picture this: You buy your first cryptocurrency on a Tuesday. By Friday, it's down 15% and the following Monday, it's back up 10%. You've barely slept so you can keep an eye on the price and find the ideal moment to sell and make some money.

While that scenario probably sounds stressful, it's very possible, thanks to the ups and downs of the crypto markets. Price swings of that magnitude (and worse) aren't warning signs of a crash or signals to sell — they're just another day of the week.

Many new investors are underprepared to face this level of volatility. Although headlines feature crypto crashes and rallies, it's important to understand why these swings happen and how they affect individual decision-making.

Why crypto is so volatile

The crypto market is still just a fraction of the size of the global stock and bond markets, which means relatively small amounts of money moving in or out can have an outsized effect on prices. For example, when a single investor makes a large trade, the ripples can be felt throughout the entire crypto market.

A cryptocurrency's value can also be unclear. Stocks are tied to companies' underlying performances, which can be measured via metrics such as earnings, assets and cash flow, while bonds pay predictable yields. Cryptocurrency has no equivalent because its value is largely determined by what participants in the market believe it’s worth. And the more uncertain investors are about an asset’s value, the more its price is likely to swing.

Add in the fact that crypto trades 24 hours a day, seven days a week with no circuit breakers to pause trading during a free fall, and it's easy to see why digital assets are so volatile. Traditional stock markets have built-in mechanisms that halt trading when prices drop too sharply. Crypto has no similar industry-wide guardrails, and a bad news cycle at 2 a.m. or over the weekend — like when renewed fears of a trade war sent bitcoin plunging in October — can do as much damage as one during business hours.

It's worth noting that not all crypto is equally volatile. Bitcoin tends to be more stable than alternatives (also known as altcoins), which can swing upwards of 50% in a matter of days. This is especially true for memecoins, such as dogecoin, which primarily derive their price from social media momentum.

Stablecoins tend to hold their value because they are pegged to stable assets like the U.S. dollar. But this type of coin is designed to function as a bridge between fiat currency and the broader crypto ecosystem, not necessarily as a growth investment.

How volatility can mess with your head

When it comes to volatility, panic selling and FOMO buying are two common mistakes new crypto owners can make.

Panic selling can happen when a sharp drop triggers fear. To stop the bleeding, an investor sells their coins in a hurry only to watch the price recover days or weeks later. Others may attempt to "catch a falling knife," rushing to buy a declining coin under the assumption it has hit rock bottom, and then end up watching it drop even further.

FOMO, or fear of missing out, works the other way around. You might see a coin's price surge and buy near its peak to avoid being left out. Then, if it course corrects, you’re left with less than what you invested in the first place.

Both behaviors are completely understandable, but they're also costly. Studies like DALBAR’s annual report on investor habits consistently show that emotional, reactive trading tends to underperform simply staying put.

Being heavily concentrated in crypto can make matters worse. When prices are rising, it's easy to feel like they will stay in an upwards trend. But investors with a less diversified portfolio — those with too much of their portfolio exposed to crypto and not enough to other assets like stocks and bonds — will see their portfolio hit harder when downturns happen, which can lead to selling at the worst time.

Obsessive price-checking doesn't help either. Crypto prices fluctuate constantly and often without a clear cause, so looking at your portfolio every few hours won’t provide much useful information. But it might keep you in a state of anxiety that makes you more susceptible to emotional decision-making.

Build a strategy that can handle the swings

An important rule to follow when investing in crypto is to only put in what you can afford to lose entirely. If a 50% drop in your holdings would meaningfully affect your financial stability, you're overexposed.

One effective method for navigating volatile markets is dollar-cost averaging, a strategy that entails investing a fixed amount on a regular schedule — say, $50 every two weeks — regardless of price. Over time, this smooths out your average entry point and removes the pressure of trying to time the market.

Diversification is another essential strategy for investors. Spreading your investment across a few established cryptocurrencies is generally less risky than concentrating in one. And more importantly, crypto shouldn't dominate your overall investment portfolio. Traditional assets like stocks and bonds have long track records of building wealth steadily over time and are more likely to help you reach your long-term investment goals. Most financial advisors suggest treating crypto as a high-risk, high-reward slice of the proverbial pie and allocating no more than 5% of your portfolio.

Finally, have an exit plan before you need one. Decide in advance under what circumstances you'd sell, whether that's a specific price target, a percentage gain or a life event that requires liquidity. Investors who make decisions before volatility strikes tend to stick to them, while those who wait until the market is moving might make choices they’ll regret.

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