Harnessing Volatility to Maximise Cryptoasset Returns

Strategies for Managing Cryptoasset Volatility

Volatility is a word often associated with uncertainty and risk. In finance, it can be a source of anxiety for investors and businesses alike. However, regarding cryptoassets, volatility takes on a different meaning.

Rather than being viewed solely as a negative attribute, volatility can create unique opportunities for those who navigate this sector with caution and strategic insight. The volatility of cryptoassets refers to their tendency to experience rapid and substantial price swings within short timeframes. While this volatility may initially seem daunting, it also opens doors to potential gains for savvy investors.

In this article, we will explore the concept of volatility in cryptoassets and compare it to the foreign exchange market, highlighting how both markets offer opportunities for portfolio managers, businesses, and individuals.

Cryptoassets vs Foreign Exchange Markets

Volatility is not exclusive to the world of cryptoassets. For example, the foreign exchange (forex) market, where currencies are traded, also experiences price fluctuations driven by various economic and geopolitical factors. In fact, volatility is essential to the forex market to create price movements.

Cryptoassets represent a relatively recent market encompassing the trading of digital currencies like Bitcoin, Ethereum, USDT, and others. Unlike forex, the cryptoasset market operates without centralised regulation, resulting in significant volatility and unpredictability. Instead, numerous factors influence digital currency prices, including market demand, investor sentiment, and government regulations.

The cryptoasset market may be a good choice for investors who wish to invest in assets with constantly moving prices, as this means there will be more trading opportunities. However, as market volatility opens investors up to more potential profit, it can also cause investors to lose a lot of money quickly. This is because the more volatile an asset, the riskier it is to trade.

Determining whether digital currency or forex is more volatile is not straightforward, as each market possesses distinct characteristics contributing to its volatility. However, like cryptoassets, forex volatility creates opportunities for portfolio managers, businesses, and individuals to profit from the changing market conditions.

The Opportunities within Cryptoasset Volatility

Embracing the inherent volatility of the cryptoasset market can lead to various opportunities for investors and traders alike. Here are some key opportunities that arise within the dynamic landscape of cryptoasset volatility:

Portfolio Diversification: Volatility in cryptoassets can serve as a diversification tool for investment portfolios. By adding cryptoassets to a traditional portfolio, investors can reduce overall risk and capture unique growth opportunities. In addition, the uncorrelated nature of cryptoassets with traditional asset classes offers a chance to enhance portfolio resilience and potentially generate significant returns.

Trading and Speculation: Volatility in cryptoassets presents an attractive environment for traders and speculators. The rapid price movements offer opportunities for short-term trading strategies, like day trading where traders can make a profit by buying low and selling high. In addition, skilled traders can leverage volatility to capitalise on price fluctuations and generate substantial profits.

One popular high-risk strategy for seasoned cryptoasset investors is short selling. "Shorting" a cryptoasset allows traders to potentially profit from its decline in value when they anticipate a decrease in the market value. However, it is crucial to recognise that shorting digital currency involves inherent risks due to the market's unpredictability and volatility. While there is potential for gains, the likelihood of substantial losses is equally probable.

So, how does shorting work? When holding a long position, even if the price of a digital currency drops, it typically doesn't plummet to zero. In such cases, although no profit is made, the original investment remains intact, providing an opportunity to wait for the price to potentially rebound. Conversely, when shorting, the price of a digital currency can continue to rise indefinitely, resulting in mounting losses. Therefore, thorough research and many years of trading experience are essential before engaging in shorting.

Business Innovation: The volatility of cryptoassets fuels innovation and entrepreneurial opportunities. Businesses can explore avenues such as accepting cryptoasset payments, launching Initial Coin Offerings (ICOs), or creating decentralised applications (dApps) to tap into the potential of this emerging market. In addition, by embracing volatility, businesses can position themselves as pioneers and gain a competitive edge in an ever-evolving financial landscape.

Also, during times of volatility, there is an increase in trading activity. More people actively participate in buying and selling digital assets during these periods, which can provide greater visibility and exposure to a newly launched cryptoasset project. The increased trading volume creates an environment where the project can gain attention and attract potential investors.

How Volatility in the Cryptoasset Market Creates Opportunities for Portfolio Managers

Volatility in the cryptoasset market creates several opportunities for portfolio managers. Here are some ways in which they can benefit:

Profit from Price Swings: Volatility in the cryptoasset market means that prices of digital assets can experience significant swings in a short period. Portfolio managers can take advantage of these price movements by actively trading and strategically buying or selling assets at opportune times. They can generate profits by capitalising on the market's volatility and timing their trades effectively.

Diversification Benefits: The cryptoasset market offers a wide range of digital currencies with varying levels of volatility. Portfolio managers can utilise this volatility to diversify their portfolios and spread their risk across different assets. In addition, by including cryptoassets with different volatility profiles can enhance the risk-reward characteristics of their overall portfolio.

Arbitrage Opportunities: Volatility in the cryptoasset market can lead to temporary price discrepancies across different exchanges or trading platforms. Portfolio managers can identify these price differentials and execute arbitrage strategies. By buying an asset at a lower price on one exchange and simultaneously selling it at a higher price on another exchange, they can lock in a risk-free profit.

Active Portfolio Management: Portfolio managers can take advantage of market fluctuations by actively monitoring and adjusting their positions. They can rebalance their portfolios by reallocating assets based on their assessment of market conditions and the potential for future price movements. This active approach allows them to respond swiftly to changing market dynamics and optimise their portfolios accordingly.

Exposure to Innovative Projects: Volatile periods often coincide with the emergence of new and innovative cryptoasset projects. Portfolio managers can capitalise on these opportunities by conducting thorough research and due diligence on promising projects. By identifying and investing in projects with strong fundamentals and growth potential, they can position their portfolios to benefit from the success of these projects as they navigate the volatile market.

It's important to note that managing a portfolio in a volatile market requires careful risk management, extensive research, and a deep understanding of the unique dynamics of the cryptoasset market; this is why working with a trusted partner when appointing a portfolio manager is essential. While volatility presents opportunities, it also carries inherent risks, and portfolio managers need to have a solid reputation and years of experience to implement sound strategies to mitigate risks and achieve their client's investment goals.

Navigating Volatility

While volatility presents opportunities, it is crucial to approach the cryptoasset market with a diligent and informed mindset. Here are some key considerations for navigating volatility:

1. Research and Education: Understanding the fundamentals of the cryptoasset market, including blockchain technology, market trends, and project fundamentals, is essential. Conducting thorough research and staying informed can help investors and businesses make informed decisions amidst market volatility.
2. Risk Management: Implementing risk management strategies is crucial when dealing with volatile assets. Setting clear investment goals, diversifying portfolios, and employing risk mitigation tools like stop-loss orders can help manage potential losses and protect capital.
3. Long-Term Perspective: Volatility should be viewed from a long-term perspective. Recognising that short-term price swings are part of the market's natural cycle can help investors focus on the potential long-term gains rather than succumbing to short-term fluctuations.
4. Working with a Reputable Portfolio Manager: As mentioned above, when navigating the volatility of the cryptoasset market, it is critical to work with a trusted portfolio manager. A reliable portfolio manager has extensive experience and expertise in the cryptoasset space and understands the unique challenges and opportunities presented by market fluctuations. 

Conclusion

Whether in cryptoassets or foreign exchange markets, volatility should not be viewed as a negative attribute. Instead, it presents opportunities for portfolio managers, businesses, and individuals who approach the market with knowledge, research, and a long-term perspective. By embracing volatility and carefully navigating the sector, investors and businesses can harness the potential for growth and innovation offered by cryptoassets. If you would like to learn more about XEROF's services or have any other questions about how XEROF can assist you as a portfolio manager, please do not hesitate to contact us.

Disclaimer: Kindly be aware that the information provided herein is intended solely for informational purposes and should not be construed as legal, tax, investment, financial, or any other professional advice.