Crypto Market Volatility Guide

Here is a quick guide to handle the volatility of the crypto market:

1. If you understand Bitcoin, you understand the crypto market.

The crypto market is highly correlated to the movement of Bitcoin. Usually, if the Bitcoin price increases, the market cap of the total crypto market increases as well. Therefore, it makes sense to focus on the movement of Bitcoin to understand other investment cycles as well.

2. Short term volatility is almost unpredictable

The crypto market historically experienced large volatility in the crypto market in the short term. For example, in the first two weeks of March 2020 Bitcoin lost 40% of its value. The price is also incredibly sensitive to temporary news, tweets, etc. which makes short term price predictions very difficult and high risk.

3. 'Hodl' and use DCA to avoid volatility

Many investors completely avoid any concerns about volatility and just invest into an asset in the long term. This is called hodling. When these investors buy an asset, they also use a strategy called Dollar Cost Averaging (DCA). It means that you invest a predefined amount in regular intervals over a certain period of time. For example, if you want to invest 1000 USD into Bitcoin, you would invest 100 USD every week over 10 weeks. Any volatility within these 10 weeks will be averaged out.

4. Understand crypto market cycles to profit from volatility

Historically, the crypto market has experienced full cycles approx. every 4 years (triggered through the Bitcoin halving event when Bitcoin halves its supply every 4 years). Roughly, these cycles can be broken down into three phases: a large spike up, a subsequent downtrend, and a final correction to a new equilibrium. The most accurate and most widely adopted model to predict the cycles and corresponding Bitcoin price levels is the stock-to-flow (S2F) model from Plan B. Plan B developed two models, one time series model and one based on the market caps of other assets (called the cross asset model). The S2F model has been an excellent measurement in the past to determine whether Bitcoin and thus the entire crypto market is over or under valued. However, the time horizon of S2F is very large. Thus, it cannot be applied for a time period of just a few months but rather 12-24 months. The model is based on the assumption that the supply of Bitcoins can always be determined. However, as more diverse products are introduced in the market, such as leveraged trading products, ETFs, the supply of Bitcoins becomes increasingly unpredictable. This is because the companies that are offering these products are paid in Bitcoin and often have a high selling pressure owing to shareholder interests. Also, miners who create new Bitcoins are mostly hodling the Bitcoins that they create which decreases the supply of Bitcoin. To conclude, on a multi year perspective S2F is likely to be still a valid indicator of whether the market is over or undervalued.

5. Optimise your investment with on chain data analysis

To model Bitcoin's price in the mid term, on-chain data can be used to optimise investments within a time period of a few weeks to a couple of months. There are several companies such as Glassnode that make such data publicly available (of course everybody can also run a full Bitcoin node and gather the data themselves). The metrics gained from the Bitcoin blockchain can be used to further analyse whether Bitcoin's price is more likely to go up or down. Glassnode also offers a free academy to learn about interpreting these metrics. In addition to this, many crypto analysts openly share their insights on Twitter, podcasts, and other channels. One of the two best analysts in the Bitcoin space are Will Clemente and Willy Woo.