How to manage volatility in the token market

Token Takeaways ✍

✨ The token market is extremely volatile, which presents opportunities and risks.  

While volatility can increase risk for tokens users, strategies like dollar-cost averaging and weighing towards Bitcoin and Ethereum can help mitigate the risks.

✨ The token market will likely become less volatile as the ecosystem matures and the asset class hits mass adoption.

Tokens are famous for their volatility. While the cryptocurrency movement has created excitement for everything from Bitcoin’s digital gold narrative to cartoon monkey pictures and the Metaverse, the space is best known for its turbulent market activity. As long as volatility defines the token market, learning how to manage it will be key to succeeding in the space. Read on for some of our top tips. 

Market volatility explained 🧠

In financial markets, volatility refers to the degree of variation in an asset’s price over a set time period. It’s typically measured as the amount the asset rises and falls from its average price. 

Volatility is typically associated with risk, with more volatile assets considered riskier than less volatile ones. 

What are Tokens 🤔

Before anything else, you need to know what is a token. Tokens represent a fascinating facet of digital currency, serving as more than just a monetary value. They embody various forms of digital assets, each carrying a unique significance and utility. Essentially, a token is a representation of a particular asset or utility, often existing on its own blockchain, and it can serve multiple purposes in the digital world. Whether it's representing ownership of a physical item, a share in a company, or access to a service, tokens are the versatile tools of modern digital transactions.

Why are tokens so volatile? 🤔

Now that you know what is token, we can talk about its volatility. Volatility can exist in any market, from the stock market to tokens. However, the token market has historically been more volatile than every other asset class.

This is because the cryptocurrency space is young and fast-moving, and it democratises access to financial exposure in projects. Tokens can launch at a small size and experience rapid growth, but they can also experience sharp declines when the market trends down. 

Additionally, the token space has historically followed market cycle patterns like other asset classes. Token market cycles tend to play out faster on a bigger scale, and they’re characterised by their extreme volatility. 

The token space has experienced several “bull” market phases followed by “bear” market downturns. This cycle has historically played out every four years. The last token bull market happened in 2021, when the global value of the space topped $3 trillion for the first time (Source: CoinGecko)

Tokens often draw positive attention when prices are rising, then the market’s positivity turns to scepticism during sharp selloffs. In turn, this adds to the market’s volatility.

Looking out for token volatility 👀

When entering the token space, it’s crucial to know how to identify volatility.  

One simple way to assess a token’s volatility is the market capitalisation—a term used to refer to the overall value of a tradable asset. While many people look at the price per token, the market capitalisation gives a better indication of a project’s value.

Token tips: Market capitalisation refers to the value of a tradeable project or company. The global cryptocurrency market capitalisation is around $1.1 trillion today, representing the value of every project in the space 💡

In the token ecosystem, Bitcoin and Ethereum have the largest market capitalisations, respectively accounting for around 46% and 19% of the space. Projects with smaller market capitalisations tend to be more volatile and risky, but they can also offer more upside during periods of market strength. 

When getting exposure to the token market, it’s important to learn how to manage volatility risk. 

Managing volatility 👌

Before collecting any tokens, token adopters should ensure that they can cover all expenses and living costs. “Only put in what you can afford to lose” is a popular mantra in the token space​​—it’s not a good idea to put in money that you may need in the short term. 

Many seasoned token adopters weigh their portfolios towards Bitcoin and Ethereum, making bigger allocations to BTC and ETH than other tokens. This is because they’re less volatile than most other tokens. Holding more volatile tokens presents a greater risk during market selloffs. BTC and ETH both feature in The Crypto Giants, our Collection dedicated to the largest projects in the space. 

Some token adopters also allocate their capital towards traditional investments such as stocks, gold, and property. These asset classes are generally less volatile than BTC, ETH, and the rest of the token market.

The DCA strategy 📅

Another popular strategy for hedging against volatility risk is dollar-cost averaging, otherwise known as “DCA.” This strategy involves buying a set amount of an asset at a given interval regardless of its price. As it mitigates volatility risk, it’s popular among smaller token users and those who do not trade. 

Token tips: Dollar-cost averaging refers to buying a set amount of an asset at a regular interval, for example allocating $50 to BTC weekly or monthly. This strategy is most effective during bear markets when token prices are lower 💡

Dollar-cost averaging during market downturns can pay off once prices rise. But it’s a good idea to look out for signs of market “froth.” Those who can recognise euphoria and avoid buying when the market is in a bull phase usually outperform those who buy as hype increases. 

Token tips: Froth is a term used to describe market conditions where asset prices rise to unsustainable levels based on sentiment rather than fundamental value. In the token space, hype-driven, frothy markets often see tokens with weaker value propositions experience rapid price surges. These periods have historically been the best time to exit the market 💡

Just as it’s worth having a strategy on entering the market, it’s also a good idea to have one on exiting. Instead of making regular buys into the market when prices are up, scaling out with regular selling during periods of upside volatility can help secure profits. 

Finally, it’s best to avoid trading or borrowing funds on leverage altogether if you are not an expert. Most traders lose money and can suffer huge losses during periods of heightened volatility. 

Learn more 💫

Extreme price volatility distinguishes the token market from other asset classes. It can present big opportunities for today’s adopters, but volatility also comes with risk. Even the top two tokens, Bitcoin and Ethereum, are volatile relative to other assets. As the token ecosystem matures and the technology welcomes more adopters, it’s likely that the market will become less volatile. In the meantime, however, the token ecosystem is still a nascent, turbulent space. That’s why managing volatility is still crucial to succeeding in the space today. 

Please note: Investing in cryptoassets is risky. Due to the volatile nature of the cryptocurrency market, investors run the risk of losing their funds when they make an investment. Returns from cryptoasset investing are not guaranteed, therefore users should always be aware of the risks.