Making Sense of Crypto Volatility
Crypto is a volatile asset class. But there are things you can do to prepare for likely losses that accompany potential gains.
We’ll jump straight to the point: Crypto is definitely a volatile asset class, meaning it can have large positive and negative returns. But there are things you can do to prepare for likely losses that accompany potential gains.
Your secret power: Being ready for volatility
There is no sugar-coating volatility in crypto, but understanding it can help set you up for long-term success. As an investor, having a plan for how you will respond to volatility ahead of time (and sticking to it) can be your secret power. When the market falls and everyone else is panic selling, you’ll know what to do.
Let’s cover the basics of volatility in crypto:
- Volatility refers to how much crypto prices change over time.
- Generally, the larger the price changes, the more risky an investment tends to be, and the greater chances of both gains and losses.
- Crypto has been very volatile in its short life, with prices climbing and falling regularly. For example, since 2021, the price of Bitcoin has bounced around with peaks near $70,000 and lows under $20,000—this is volatility in action.
3 steps to help coast through crypto volatility
You don’t have to let volatility take you for a ride. Here are three tools that you can use to manage through volatility to help keep your investments on track over the long term:
- Diversify your investments. If your overall investment portfolio is diversified, crypto doesn’t have to feel as daunting if it’s only a small percent of your net worth. That’s also why we recommend only 5% or less of your investable assets in crypto.
- Use dollar cost averaging. One method is to use dollar cost averaging to reduce risk and build up your investment over time. Using dollar cost averaging, you would deposit a consistent amount into your crypto portfolio each month. At Betterment, you can set up a scheduled deposit into your crypto portfolio to automate dollar cost averaging. This results in buying more units when prices are low and less when they’re high. You can use this approach with stocks and bonds as well.
- Be intentional about monitoring your portfolio. It can feel good to log in and see gains, sure. But logging in during a down period will probably just make you feel stressed. And we don’t make good decisions when we’re stressed—like panic selling for a loss. Take a break from frequently checking your performance when markets are down.