Three reasons to remain calm through bitcoin volatility

It’s been a rough year so far for investors in cryptocurrencies.

The most famous cryptocurrency, bitcoin, has suffered a series of losses over the first half of 2022. It now sits below US$20,000 for the first time since November 2020[1], down more than 70% from an all-time high of US$68,000 per coin in November 2021. Bitcoin has lost about US$900 billion in value since that peak.

Another popular cryptocurrency, ether, is also suffering big losses. The second-largest digital token by market cap has plunged to its lowest level since January 2021. The coin has lost about 80% of its value from its record high last November.[2]

The crypto meltdown is part of a larger downturn in stock markets around the world. This is happening amid soaring inflation in many countries, rising interest rates and concerns about the global economy. What’s more, sometimes it can feel as though the media is proclaiming the triumph of cryptocurrencies one week, and then their demise the week after.

There are many reasons cryptocurrencies are so volatile. Understanding what influences their market prices can help you decide whether to invest in them or continue watching their developments.[3]

Below are three things investors should remember when investing in cryptocurrencies.

1. Volatility is to be expected.

Gold has been around a long time. Accordingly, it is reasonably stable in terms of price, demand and supply. Likewise for fiat currencies (e.g., the U.S. or Canadian dollar): while exchange rates between countries fluctuate, the values of fiat currencies are mostly predictable, based on the issuing country.

Bitcoin started to grow in popularity around 2010. Since then, its price has risen by tens of thousands of U.S. dollars. Because bitcoin has only been around for about 13 years, it is still in what is called the “price discovery” phase. This means that prices will continue to fluctuate as investors, users and governments work through the initial growing pains and concerns until – we hope – prices stabilize.[4]

Cryptocurrencies also receive a lot of attention in traditional and social media. For this reason, their value can be particularly sensitive to media hype, both positive and negative. So called “influencers,” industry moguls and celebrity cryptocurrency fans (many of whom are heavily invested in crypto themselves) often opine publicly about the value of one cryptocurrency or another. This can create investor concerns and lead to price fluctuations.[5]

2. Acceptance continues.

Lawmakers across the world are trying to figure out how to establish regulations and frameworks to make cryptocurrency safer for investors and less appealing to criminals. Some governments are trying to attract capital and innovation in the blockchain-related industry. El Salvador was the first country to make bitcoin legal tender in 2021. Some U.S. states aim to create accommodating conditions for bitcoin miners, investors and entrepreneurs.[6]

Meanwhile, there is growing acceptance of cryptocurrencies among different types of investors. The first physically settled bitcoin ETF launched on the Toronto Stock Exchange in February 2021.[7] Crypto ETFs offer a more conventional way to invest in cryptocurrencies. Several crypto-focused ETFs have since launched that allow investors to gain exposure to cryptocurrency via traditional investment platforms.

In addition, large companies in multiple industries are taking a growing interest in cryptocurrencies. AMC recently announced it will accept bitcoin payments by the end of 2022. Fintech companies such as PayPal and Block are also betting on crypto by allowing users to buy, sell and transfer bitcoin on their platforms.

3. Stay diversified!

One of the best ways to combat volatility is to maintain a diversified portfolio. This could include various types of assets, such as stocks, bonds, gold, real estate and, yes, cryptocurrencies.

It isn’t a great idea to put most of your savings into one place, no matter how promising the investment looks. During the crypto boom leading up to late 2021, many investors pumped lots of their savings into cryptocurrencies. And many of those same investors lost a lot of money when the value of cryptocurrencies plunged.

However, crypto assets may still offer a good opportunity to enjoy big returns thanks to their potential asymmetric return profile. That is, the potential upside of an investment in crypto may be greater than the potential downside.

Bottom line

If you’ve decided to invest in cryptocurrencies, you must accept that volatility will likely be part of the ride for the foreseeable future. Keeping this in mind both during the market highs and lows will help you keep a level head and a focus on the long term. What’s more, crypto assets are being adopted by more and more institutional and retail investors. As investors learn more about these assets and what influences their market value, prices may become more stable. In any case, cryptocurrencies should make up only a portion of your diversified portfolio. This ensures that big losses like the ones we’ve seen recently don’t affect the entirety of your savings.