Bitcoin Roller Coaster: How Investors Can Benefit from Volatility
- Volatile prices create opportunity for profitable trading.
- Last week’s Bitcoin Roller Coaster: 8% Down on Wednesday and a shot up to 22% on Friday.
Bitcoin volatility went through the roof again last week. The leading digital currency took a deep dive last Wednesday, breaking through the $7,500 mark. The benchmark cryptocurrency lost more than $500 within just two hours of trading. Most other cryptocurrencies didn’t fare any better: Ethereum was down 7%, and XRP lost 6 %. The entire crypto market capitalization lost about $19 billion within 24 hours.
After a loss of roughly 8%, Bitcoin gained almost 22 % 2 days later on Friday and more than compensated for Wednesday’s losses. The reasons for the price drop and the subsequent price increase were more or less the same: regulatory speculation and large order volumes.
Regulatory uncertainty and leveraged bets caused Wednesday’s price drop
There were mainly two reasons for the losses on Wednesday: Firstly, the regulatory uncertainty caused by the hearing of Facebook CEO Mark Zuckerberg before the United States House of Representatives Committee on Financial Services. Most of Bitcoin’s decline happened in less than three hours leading up to Zuckerberg’s scheduled testimony. Market participants’ fear of increased regulatory scrutiny drove the sell-off. Secondly, similar to the price drop from $10,000 to less than $8,500 in September, leveraged bets again played a key role, as traders liquidated long positions worth more than $250 million on the crypto derivatives exchange BitMEX. Considering the relatively low trading volumes in crypto markets, such moves can cause significant downward pressure.
Ahmed Jacob, CTO and Dubai-based Managing Partner of the Blockchain Investment INVAO says, “The pattern is similar to what we have seen in earlier crypto sell-offs. Institutional investors liquidate highly leveraged positions and retail investors who don’t know what’s going on are left holding the baby. Anyone who invests in crypto markets needs to keep their eyes on the ball because things can go south very quickly.”
The flipside of high volatility: What goes down must come up again
The price increase was attributed to comments of China’s President Xi Jinping, who said his government would massively invest in the build-up of blockchain infrastructure. Although he didn’t specifically refer to Bitcoin – and it is unlikely that the Chinese government will take on a Bitcoin-friendly stance anytime soon – his comments caused positive market reactions.
Moreover, short-sellers who had bet against Bitcoin had their positions liquidated and had to scramble to cover their bets, driving up Bitcoin demand.
“The flipside of high volatility is that prices may recover just as quickly as they have come down,” says Jacob. “It just needs some positive news to cause the momentum to reverse. The same mechanism that leads to rapid losses can also cause significant price increases. The challenge is to time the market and get back in before the upside is being realized.“
INVAO actively manages a portfolio of blockchain assets with a strong focus on risk management and performance optimization. As the portfolio is actively managed, INVAO can secure its portfolio assets in stablecoins or fiat currency as soon as markets turn bearish to avoid the pitfalls of high volatility.
During last week’s sell-off, INVAO’s portfolio lost only 1.5% compared to the 8% loss of the overall market. INVAO’s traders temporarily secured their assets in cash positions and reinvested as soon as markets turned bullish again, participating in the subsequent growth cycle.
Jacob points to the strength of an actively managed crypto portfolio. “Risk management works,” he says. “No matter if it’s equity, real estate, or crypto assets.” During the year 2019 up until October, INVAO’s portfolio achieved a healthy return of 119% for its investors, outperforming both Bitcoin as well as the top-30 cryptocurrencies combined.