Volatility: What It Is, Its Importance, and Its Impact on Cryptocurrencies

Sharp price movements don’t surprise any experienced investor – especially in the case of cryptocurrency volatility, which is among the highest across all asset classes. The cryptocurrency market shows a high degree of price volatility, with fluctuations closely tied to the price development of Bitcoin. It is commonly observed that when Bitcoin rises, positive sentiment spreads to altcoins, increasing the overall market capitalization.

Conversely, when Bitcoin’s price drops sharply, most cryptocurrencies follow the same trend, leading to significant losses for investors. This is when the term volatility comes into focus – a term that many may not fully understand. So, what is volatility, why is it important, and what does it mean?

Volatility – definition and meaning

Volatility is a key concept in investing and finance. It refers to the degree of price fluctuation of a given asset over time. If we say that an asset is highly volatile, it means its price changes frequently and significantly – both up and down.

For example, the volatility of a mutual fund is a critical factor when choosing a fund, as it signals the potential returns (or losses) an investor might expect. Volatility is often discussed in the context of conservative versus dynamic strategies – low volatility means stability, while high volatility may offer greater gains but also higher risk.

In the case of cryptocurrencies, the situation is even more complex – their volatility is influenced not only by internal factors like adoption or regulation but also by external triggers like tweets from public figures, macroeconomic news, or geopolitical tensions. All of these shape what cryptocurrency volatility means and how investors perceive it.

How is market volatility measured?

Market volatility – whether of a specific asset or fund – can be quantified in several ways. The most common methods include:

Using the beta coefficient

This coefficient measures the volatility of a single asset compared to the broader market – typically represented by a stock index (such as the S&P 500). This approach is especially useful for evaluating a stock’s volatility relative to the market. If a stock has a beta value greater than 1, it means its market volatility is above average, and its price fluctuates more than the overall market.

Conversely, if the beta is below 1, the asset is less volatile – which is more attractive for conservative investors who prioritize stability. Stock volatility thus plays a key role in assessing investment risk.

This indicator is one of the basic tools for defining the significance of volatility in investment analysis and is widely used to compare various assets within a portfolio, including mutual funds, ETFs, and cryptocurrencies.

Standard deviation

This is a statistical metric that shows how much the historical price of an asset – such as a stock, cryptocurrency, or fund – deviates from its average. In practice, it is one of the most accurate ways to quantify market volatility or that of a specific financial instrument.

If the standard deviation is high, it means the asset’s price is highly variable – indicating high volatility. A low standard deviation indicates more stable price development, typical of conservative, low-volatility assets. This metric helps clearly explain what volatility means in practice and why it matters to the average investor.

Cryptocurrency Volatility in Practice: Why Is Short-Term Volatility So Unpredictable?

Short-term cryptocurrency volatility is one of the most difficult phenomena to predict on the market. Unlike stocks or mutual funds, which are subject to regulations and economic cycles, crypto volatility is driven by a wide range of factors – from technical indicators and regulatory news to speculative actions by major market players.

A typical example is May 2021, when Bitcoin lost as much as 37% of its value in just 11 days. This dramatic drop was caused by a series of negative news and investor reactions, clearly illustrating what cryptocurrency volatility looks like in practice. It also shows that the volatility of the crypto market is much higher than that of stocks or mutual funds.

Short-term price swings are often the result of:

• Macroeconomic announcements (interest rates, inflation, central bank policies),
• Sentiment on social media,
• Opinions of influencers and whales,
• and on-chain data showing the behavior of large crypto holders.

For these reasons, it is very difficult to predict market movements based solely on historical data – and crypto volatility remains a key challenge, but also an opportunity for risk-tolerant investors.

Volatility at the Crypto Market

Volatility is one of the primary factors used when evaluating any investment – whether it’s stocks, mutual funds, or cryptocurrencies. In the case of cryptocurrencies, market volatility is often higher than with traditional assets, which brings both risk and the potential for significant returns.

Investors typically take on more risk when they believe the potential reward is worth the chance of losing part of their capital. This is especially true for cryptocurrencies, where volatility is a normal and expected phenomenon. That’s why it’s important to understand what volatility is, its meaning, and how to manage it effectively.

However, there are several ways to reduce the potential risk of your crypto investment portfolio.

Buy & Hold

Due to the short-term unpredictability of prices – a result of high crypto volatility – many investors take a long-term approach. The “buy and hold” strategy involves buying and holding an asset for several years, regardless of short-term market fluctuations. These investors don’t try to time the market but believe that Bitcoin’s long-term potential and growing adoption outweigh short-term swings.

Historically, anyone who held Bitcoin for at least four years never experienced a loss, which shows that while crypto volatility can be high, it doesn’t necessarily mean failure if the investor understands what volatility is and how to handle it over time. Additionally, data shows that currently, 96% of holders are “In the Money” – meaning they are in profit at the current BTC price.

Portfolio Diversification

Retail investors are especially advised to diversify their investments across multiple cryptocurrencies to minimize risk. Most specific (non-market) risk in a portfolio can be eliminated by allocating capital into 20 to 30 assets. A popular strategy is to invest in a “basket of cryptocurrencies” – such as our Fumbi Index Portfolio, which currently includes over 20 different cryptocurrencies. Risk reduction can also be achieved by combining assets with negative covariance. Read more in our article: Diversification – What it is and its importance.

Cost Averaging

One proven investment technique to mitigate the negative effects of volatility is cost averaging. This long-term strategy involves regularly purchasing small amounts of an asset over time, regardless of the market price.

For example, instead of investing €2,400 in Bitcoin all at once, an investor chooses to invest €100 monthly over two years. This method reduces the impact of market volatility on the entry price, as the average purchase price balances out over time. It also minimizes the risk of buying at the top of a cycle, which is common in volatile markets.

This strategy is ideal for investors who understand what volatility means and do not want their investments influenced by short-term price swings. The meaning of volatility is clearly demonstrated here – it refers to price fluctuation that can significantly affect returns. Regular investing helps to “ignore” this volatility and stay focused on long-term goals.

Combining Volatile and Less Volatile Assets

If you are an investor with a lower risk tolerance, it’s best to combine risky and less risky assets, including traditional instruments like mutual funds, bonds, or gold. The goal of this strategy is to optimize the risk/reward ratio and effectively manage market volatility, which can significantly affect investment performance.

An ideal solution may be our Bitcoin and Gold, which combines Bitcoin’s high-growth potential with the stability of physical gold. It’s a unique product built using modern portfolio theory to create diversification that reduces crypto volatility while still targeting high returns.

Four Important Tips to Help You Manage Your Investments

Avoid the FOMO Effect

FOMO (Fear of Missing Out) is a psychological phenomenon caused by the fear of missing something that others (at least temporarily) enjoy. In the context of cryptocurrencies, it often triggers an emotional reaction to sudden price increases, which is a typical example of volatility in action. Cryptocurrency volatility causes sharp price movements in a short time, prompting investors to act quickly – often without considering their long-term strategy.

Investing under the influence of FOMO may lead you to buy a cryptocurrency you normally wouldn’t consider. The same applies during rapid price increases – fear of missing out can lead to purchases at the market peak, when volatility is at its highest and decisions are riskiest.

To avoid the consequences of emotion-driven investing, it’s crucial to understand what volatility means and focus on investing regularly, rationally, and with a long-term plan.

Set Your Investment Goal

Remember, investing in cryptocurrencies is not a quick way to get rich. The crypto market is highly dynamic and volatile – exactly what defines volatility. That’s why it’s essential to have clear investment goals to stick to, regardless of market sentiment.

Before investing in cryptocurrencies, plan your entry point (when and at what price you buy) and your exit point (at what price you sell), and follow these rules even during periods of high market volatility. This helps avoid impulsive decisions caused by price shocks or emotions like FOMO.

Goal-oriented investing with a long-term strategy helps manage crypto volatility. Discipline and planning are the keys to managing risk and making rational decisions even in unpredictable situations.

Don’t Let Emotions Control Your Investments

Lack of knowledge and experience causes many investors to react emotionally in times of panic – especially during high market volatility – and sell off their investment portfolios, often when their assets are at a loss. This behavior is a common result of misunderstanding what volatility is and how to manage it properly.

Cryptocurrency volatility can be extreme, and for inexperienced investors, it often causes stress, doubt, and impulsive decisions. Instead of a rational strategy, emotional reactions take over – damaging long-term returns. Read more in our article – Emotions and Their Impact on Investor Behavior.

Don’t let emotions influence your investment decisions. Success is not about quick profits, but about staying resilient during market fluctuations, understanding volatility, and building your portfolio on solid foundations.

Long-Term Investing Is the Way

Investors should not enter the market only for short-term gains. Cryptocurrency investing should be seen as a marathon based on patience and persistence. The technology is still evolving and may take more time before it’s ready for daily use.

“I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.”
Steve Jobs

Invest With Fumbi

If you are considering investing in cryptocurrencies, Fumbi is here for you. Take full advantage of the potential of our products, Fumbi Index Portfolio and Fumbi Bitcoin & Gold.

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