How Can Investors Navigate Crypto Volatility?

Vast crypto opportunities also present challenges

Leading cryptocurrencies like bitcoin and ethereum are attracting a lot of attention, and even gaining traction with established investors who may previously have been averse to joining the digital coin investment space.

“There’s still a ton of uncertainty about the future — it’s gone so mainstream that we know it has value, but what that value is, I think, is still very much up for debate,” Jim Greco, managing director of crypto trading firm Radkl, told Bloomberg at the end of 2021, a year that brought deep highs and lows for bitcoin.

Some of the very features that make crypto investments compelling can often lead to high levels of volatility — these include the lack of limits on trading hours, limited supply, unpredictable sentiment changes and the absence of backing from central banks or governments.

These factors make it so bitcoin and other coins require strong stomachs from investors.

“Massive retracements are always scary, but seasoned investors tend to see them as buying opportunities,” Mati Greenspan, portfolio manager and founder of Quantum Economics, told CNBC.

The price history of bitcoin is more than enough proof of the volatility investors continue to see day in and day out.

“Volatility is going to be there until there's a full adoption with concrete use cases,” Eloisa Marchesoni, founder of crypto consultancy firm Def.Ai, told the Hill. “And we’re not seeing that yet at all.”

Experts don’t shy away from accepting volatility

Som Seif, founder and CEO of Purpose Investments, previously told INN that any investor evaluating or maintaining a position in the crypto space has to be prepared to deal with a high level of volatility.

“Volatility is a part of this space because it’s still nascent ... it’s still betting on the future,” Seif said.

The executive said if an investor has a long-term outlook on a sector, volatility becomes part of the ride. He gave the example of internet stocks in the early aughts, some of which are now worldwide leaders, saying their history shows the volatility that must usually be endured in early stage markets.

“You have to sort of dissociate volatility from the thesis,” Seif told INN.

Being aware of the volatility connected to cryptocurrencies is key, and it's even presented as a critical risk warning by one of the newest bitcoin funds offered in Canada.

In the prospectus for the Ninepoint Bitcoin ETF (TSX:BITC), the management team at Ninepoint Partners includes several disclosures intended to remind investors about the risks associated with bitcoin.

While much of the language is standard fare for any kind of investment, the emphasis on the high level of risk tolerance required with bitcoin makes it clear that investors should be prepared for a potentially bumpy ride.

Ninepoint Partners states in its prospectus:

Ninepoint Bitcoin ETF (“Ninepoint Bitcoin ETF”) invests in the digital currency Bitcoin (as defined herein). Given the speculative nature of Bitcoin and the volatility of the Bitcoin markets, there is considerable risk that Ninepoint Bitcoin ETF will not be able to meet its investment objectives. An investment in Ninepoint Bitcoin ETF is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. An investment in Ninepoint Bitcoin ETF is considered high risk.

Investor takeaway

Bitcoin went through several ups and downs in 2021, driven largely by investor sentiment. Even so, its closely watched price action is indicative of how far the cryptocurrency has come in a relatively short time.

“Bitcoin volatility is still high,” Noelle Acheson, head of market insights at digital asset broker Genesis, told Bloomberg. “Investors are starting to accept that it’s not a bug, it’s a feature.”