Tips to sustain in such a volatile market

Many of us refer crypto market as a risky and volatile market. The crypto industry size, measured by the market value of all coins, crossed the $1 trillion mark for the first time in Jan 2021 and hit a maximum of nearly $3 trillion in Nov 2021. Currently, it is $1.27 trillion as of 20 May 2022. This industry exhibits significant volatility. Sustaining in such a market requires a different skill set.

As the industry is at a very nascent stage of development, higher volatility is a common phenomenon at this stage of growth. However, the number of crypto users is nearly 300 million, and per capita, crypto holding is currently less than $5. Despite being at a very nascent stage, this market has a much higher trading velocity, measured by trading volume divided by the market capitalization, compared with the equity market – more than seven in crypto compared with less than two in equity. The reason is the significant trading volume through automated trades. A large portion of the asset is managed electronically (through bots with user-defined trading range, target profit and loss criteria etc.)

Value of global equity trading worldwide from 1st quarter 2017 to 3rd quarter 2021(in trillion U.S. dollars)Although volatility is very good for a class of market participants as it provides them opportunities to make money, for many, it may throw opportunities to hone their portfolio skills.

As we all know, the basic of investment is understanding the underlying and the instrument. Equally important is to comprehend the risk ability and appetite; as a rule of thumb, we must go with the least of both.

Volatility is a time-sensitive phenomenon and hence enhancing the holding period reduces the effective volatility and risk. You may have heard on multiple occasions that; the BUY and HOLD strategy is suitable for investors. Here they generally refer to investment as a long-term holding of underlying assets.

For cryptocurrency, one should search and find the source of value of a cryptocurrency or crypto asset. A coin or token derives value from its blockchain efficiency and use cases. Understanding the value chain and the sustainability of the claim makes it a sustainable asset. Most often than not, one tends to either ignore or downplay the role of blockchain technology. Taking cognizance of the fact that blockchain technology will alter the face and pace of every industry will make an individual a better decision-maker, both in crypto or conventional asset space.

Considering the complexity of managing volatile assets, several asset management firms offer their services to manage crypto portfolios – both actively managed and passively managed portfolios. However, the passive portfolio seems to get an edge over active management in the case of crypto. For example, if one had managed one’s portfolio around IC15 (Index of cryptocurrencies), the result would have been better, considering the risk-reward ratio.

Generally, an investor becomes myopic and gets trapped in the noise of the market or street. Crypto investors are no different. Being focused on the goal empowers an investor to deviate less and keeps him firm in his decisions. It also helps in diversifying the investment within the asset class. However, choosing a coin or token is rigorous due to the number of options available. Fortunately, this industry has an abundance of information available and being a little cautious is enough to choose an exposure supported by sound fundamentals. However, falling prey to mal-intentioned projects is common like other asset classes – be it equity, real state or elsewhere.

Diversification within asset class as well as across the asset class generally reduces such risks along with other systemic and idiosyncratic risks. An article from a reputed magazine tries to find an answer through five experts on the quantum of overall portfolio one should invest in risky assets like crypto; the experts opine in the range of up to 5%. Going by the granny’s advice, one should not invest in a risky asset that one can afford to lose. However, modern investment studies suggest keeping the leverage under control all the time.

The crypto industry offers handsome returns to long term investors or crypto holders in terms of lending and staking income in which their assets work for them, rather than accumulating dust in wallets.

Since the crypto market is almost sharing similar products as equity markets, the portfolio concepts, like ETF and Hedge Funds etc. are available to investor in global markets.






Views expressed above are the author’s own.


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