News flash: Crypto prices are volatile. That’s not new – and it’s not a problem.
What is new is the growing divide between how sophisticated investors see crypto and how most individual investors react to it. When prices surge, crypto owners get giddy… And when prices swoon, many assume something is wrong with the whole asset class.
But institutions aren’t pulling back. In fact, they continue to allocate – because of crypto’s volatility, not in spite of it.
Here’s the key misunderstanding: Crypto volatility isn’t a flaw. It’s a defining characteristic – and it creates both risk and opportunity. The real danger isn’t price movement. It’s treating a volatile asset emotionally, without a long-term plan, without knowing your risk tolerance and without appropriate diversification.
When crypto is approached deliberately – as part of a broader strategy – volatility stops being something to fear and starts becoming something we can manage. For example, the head of research at a large investment company with specialties in bitcoin specifically described crypto as, “an alternative asset class, and we are seeking its particular return characteristics.”
Translation: They’re looking for that volatility and what it can bring.
Why would institutional investors want volatility?
First, let’s define volatility in the financial sense: Volatility is a measure of price changes (up or down) over time.
“High volatility” means prices jump around a lot. “Low volatility” means prices stay relatively steady.
That’s it – that’s volatility in a nutshell.
So, is volatility good or bad?
Neither! Because that’s the wrong question.
Here’s the thing to understand about volatility: You need that risk to have upside potential. (Last year I sat down with a professional trader for a deep dive into the pros and cons of volatility – check it out.)
Prudent investors diversify with volatile asset classes like crypto don’t make their decisions emotionally or blindly. They make rational decisions, and they invest carefully, with an eye on the long term. Franklin Templeton offers some great guidance on managing volatility through portfolio construction, for example.
By doing that, they are able to take advantage of the upside potential of crypto with the possible strong gains without risking everything.
That’s a smart strategy that anyone can use.
How you should think about diversifying with crypto
The first thing to think about with your crypto investments is how much crypto are you holding. We usually measure this as a percentage of overall savings. This is a personal decision that nobody can make for you, by the way. Because there’s a trade-off involved.
Holding a smaller portion of your portfolio in crypto, you lose out on potential gains during bull runs. And you also avoid massive on-paper losses during “crypto winters.”
How much crypto you own is more important than crypto price changes. Everyone wants the growth potential, but you have to be able to handle the risk emotionally and intellectually.
Crypto is not a replacement for traditional asset classes! It’s a complement to them. You want to make cryptocurrencies part of your overall savings. That’s the principle of diversification in action.
It’s not just about diversification, though…
Smart investors are diversifying, both in crypto and with other asset classes.
Beyond that, though, smart investors think long-term.
This isn’t anything new. Smart investors in all asset classes think about the long-term. They aren’t looking to make a quick buck day-trading. They’re looking for how to best grow the value of their overall portfolio over time. We shouldn’t be trying to maximize our returns today, after all. Our goal should be to maximize our returns for retirement, which is usually decades away at least.
When you think long-term, short-term setbacks don’t need to throw you off of your game. You remember that’s just part of the investing game. It’s not just about price drops, either. When you think long-term, price spikes don’t make you giddy.
And that’s a good thing! Because emotional decisions in investing are much more likely to be bad decisions.
You want your decisions to be rational, wise and considered. Taking into consideration the possibility of growth while balancing stability. The goal isn’t to pick a winner – the goal is to retire comfortably.
If you’ve stuck with me this long, you probably realize I’ve been avoiding the question implied by the title of this article… “Well, Cory, if volatility isn’t the biggest risk, what is?” The biggest risk in investing, in my mind, is simply this: Overestimating your risk tolerance. That can lead to taking on more risk than you’re really comfortable with. At best, you’re looking at sleepless nights, possibly ulcers. At worst, you’re looking at selling at the worst possible time (when prices fall), setting your retirement back years or even decades. That’s why risk tolerance and diversification are such deeply personal questions that no one can answer for you.
So how should you think about investing in crypto?
How would you approach any other asset?
Because, when you strip away the emotion, crypto is just another asset class. You’d periodically review your investments and rebalance. You’d buy and hold it for the long run. You’d change your allocations as your horizon shortens (pivoting from growth to preservation).
We’ve covered getting started with crypto extensively, and here are the key things you should know:
- 5 fundamental rules for diversifying with crypto
- Top crypto mistakes beginners make (and how to avoid them)
- Diversifying beyond bitcoin
Investors want the potential. They just don’t want to bet it all by going all in and swinging for a home run (while desperately needing that homerun).
That’s a smart way for you to approach crypto, too.
Remember, price volatility in cryptocurrency won’t disappear (it’s a feature, not a bug). So make volatility your friend. With discipline in your investing, you can put yourself in the position to take advantage of crypto’s potential. I don’t mean you should bet the farm! I mean you should consider exposure to crypto as it aligns with your risk tolerance and your investing needs.
If you like the idea of diversifying with cryptocurrencies without worrying about crypto taxes, I have good news! You can open your Digital IRA with BitIRA anytime, day or night – in less than 10 minutes.
Not sure whether crypto is right for you? Start your due diligence with this free Insider’s Guide to Crypto IRAs.
