The crypto market is emerging as a trillion-dollar ecosystem, with market capitalization recently surpassing the $2 trillion mark. However, this has dropped to $1.28 trillion as of press time following the May 2021 bloodbath. Crypto prices have now been trending down for the past two months.
While such a wipeout would have been catastrophic in traditional markets, it is a mere norm for the volatile crypto market. This market’s volatility cuts both ways giving both bulls and bears an opportunity to make a killing, although not all the time. So, how can you trade safely in this volatile market environment?
The next section of this article highlights five ways crypto traders can avoid catching ‘knives’, especially with the market currently trending downwards.
Trading Crypto in a Volatile Market
There are several ways that crypto traders can leverage to trade safely in volatile market conditions. Before diving into the details of each, note that this is not financial advice, and it is always best to do proper research and due diligence before investing in any market or product. That said, here are the five ways that crypto traders can use to survive and thrive amidst the volatility:
1. Risk Diversification
Risk diversification is as important in crypto as it is in traditional markets. Crypto traders can minimize the effects of volatility by diversifying their portfolios across several digital assets or featuring a combination of crypto and traditional investments such as stocks and commodities. In doing so, a trader’s portfolio is exposed to less risk, given that traditional markets are less volatile.
For traders whose preference is purely crypto assets, they can choose to leverage upcoming derivative instruments to build a hedged portfolio. Currently, there are multiple crypto derivative platforms, including Binance, Bitmex and FTX, all of which offer crypto derivatives. With these instruments, crypto traders can hedge their positions by building a delta-neutral portfolio or using other suitable strategies.
2. In-depth Market Analysis
Despite being a young market, the crypto ecosystem features a wide range of products which means that investors have to do proper research to identify suitable investments. In most cases, the traders and investors in this market follow popular opinions on social media platforms such as Twitter and TikTok. Some of the calls are profitable but most end up in significant losses.
In-depth market research is one way that crypto traders and investors can avoid taking such hits. Some of the platforms that feature comprehensive crypto data include Coingecko and Coinmarketcap, where users can analyze historical price action, project fundamentals and tokenomics, amongst other factors. Crypto traders can further complement this data with industry reports from players such as Glassnode and Messari. This places them in a better position to make informed trading decisions based on research.
3. Social Crypto Trading
The rise of social media has changed how the world interacts, with most of the communication now happening online. Similarly, this paradigm shift is changing how traders interact with financial markets. Social trading is a new form of investing that allows traders to share ideas and information, reducing the learning curve of newbies while incentivizing experts to share their trading strategies.
In crypto, one upcoming crypto derivatives exchange dubbed Bingbon features a social trading platform. This exchange allows veteran crypto traders to share their trades in return for 8% on profits earned from successfully copied trades. Meanwhile, newbie crypto traders can choose from a wide range of experts and follow the ones that suit their trading strategy. Even better, a trader can choose to automatically copy trades or modify their execution based on additional information. This form of trading comes in handy in the volatile crypto market.
4. Proper Due Diligence
Crypto traders and investors can also avoid the volatile nature of the market by doing proper due diligence on prospective projects. Some of the areas they can focus on include the fundamental value proposition of a particular project, its team, tokenomics and the market liquidity for day traders and scalpers.
This helps avoid volatility pitfalls given that some crypto projects have become popular for ripping off investors in what is dubbed a ‘rug pull’. Proper due diligence will help traders identify projects that seem to be scams as most will have anonymous teams, insufficient documentation, low liquidity, and unrealistic targets, likely sweet nothings.
5. Non-Custodial Custodial Wallets and Exchanges
While the previously highlighted ways minimize volatility, crypto traders can secure themselves more by using non-custodial services. This is not necessarily linked to the volatile nature of crypto assets but rather the ecosystem’s security. Non-custodial crypto services allow crypto users to store and trade their tokens from a private wallet.
This means that they are the only ones that have the private keys to their crypto custody. Essentially, non-custodial crypto services ensure that crypto users can secure their funds hence eliminating the uncertainty that comes with the probability of being hacked.
The crypto market is generally volatile, calling for traders to focus on capital preservation while making conservative gains. Some ways to trade crypto safely that have been highlighted in this article can make a massive difference if implemented correctly. However, both veteran and newbie traders should never forget to trade only what they can afford to lose, as crypto is always full of surprises!