The phrases cryptocurrency and volatility go hand in hand. Digital assets represent some of the riskiest investments currently available. What is it that makes cryptocurrency prices so volatile and what can you, as an investor, do to mitigate your risk?

The first part of the question involves a deeper look at how value is derived and how it differs from valuations of an equity investment.

Lack of Fundamental Valuation

One massive difference between the digital asset market and the equities (read: traditional) market is the fundamentals that determine the valuation of an asset. If you were to ask a top equities fund manager how they determine a stock’s value, they would likely be able to point to finite numbers.

Factors like EBITA, company debt profile, and C-suite executive movements give at least some indication to where a company’s future lies. Very little of this exists in the crypto market.

Constantly Changing Regulatory Outlook

The regulatory bodies that govern fiscal policy relating to cryptocurrency are having great difficulty in determining appropriate rules to dictate the industry. They must carefully walk the line between over and under-regulating. Too little oversight and investors will be taken advantage of by malicious parties. Too much intervention and blockchain innovation is stifled.

The result of this caution is regulatory confusion, legal “grey areas”, and frequent flip-flopping on nation-wide bans.

A History Marked By Scams and Fraud

You’d be naive to believe the cryptocurrency market is free of bad actors. After countless exchange hacks and fraudulent ICO schemes, these bad actors have unfortunately had a big impact on overall market trust. Investors need to know their money is safe and, in the minds of many, that just can’t be guaranteed.

Lack of Technological Understanding

In any market, understanding of an investment vehicle spurs added confidence which, in return, stabilizes the price. Blockchain technology is not something many people can completely wrap their head around. Because of this, many pour money into things they aren’t very confident in, trusting others whom they believe to be more knowledgeable than themselves. Trust can be easily lost and, with it, the price of assets can plummet.

Those that don’t understand the tech behind cryptocurrencies tend to panic sell when bad news hits the market.

Inexperienced Project Leaders

The bitcoin whitepaper, which marked the beginning of all cryptocurrency, was released just over a decade ago. It wasn’t until the last two years that crypto became visible to the public eye. Because of this, there are very few entrepreneurs with experience in the industry. Even the most popular cryptocurrency teams are full of guys and girls that haven’t figured out the best ways to navigate the market.

With a lack of experience comes a lack of stability. Stability requires confidence.

What Can You Do About It?

Hedge

The cryptocurrency derivatives market is still young but growing at an astronomical pace. With the launch of new crypto derivative exchanges, traders will have more options to make money regardless of macro trends in the market.

It’s only a matter of time that derivative products that are popular in equities markets become a staple in the digital asset world. Vehicles like options, futures, and swaps allow investors to finely tune their risk profile.

Tons of teams have pledged to have operational cryptocurrency derivative trading platforms in 2019.

A quick list of some of these organizations

Hold

Holding (I refuse to say “Hodling”) can at times be very stressful. However, across all markets, long-term investors have historically fared significantly better than those trying to time the market. Even the best and most experienced traders in the world are incorrect half the time.

For long-term storage of digital currencies, it is highly recommended to keep your funds in cold storage with a wallet like Ledger Nano S or Trezor.

Tether

If keeping your money in a particular asset through a downward market trend doesn’t appeal to you, it might be wise to tether your investment to a stablecoin. Popular stablecoins pegged to the US Dollar include:

Converting your holdings to a tethered stablecoin guarantees more certainty that your cryptocurrency investment isn’t going to zero anytime soon. It’s recommended to tether only to reputable stablecoins that have public audits by a bank. Without this, you can’t be sure the organization has enough money to pay to coin holders.

Conclusion

The crypto market can be scary. Wild swings in valuation and market trust make digital assets much riskier than more traditional investments. Be sure to do thorough research before investing. Don’t invest more than you can afford to lose.