Volatility — How To Make Informed Decisions In The Volatile Crypto Market?

Volatility in Cryptocurrency is very common as it is in its nascent stage when compared to other investment tools and currencies. During the start of the year, a lot of investors started to show interest in cryptocurrency market and in turn they got good returns too. But the situation changed upside down towards the start of May. The market crashed massively and many of the investors’ capital was in loss.

The total crypto market capitalization went to $1 trillion in January reaching an all-time high of around $2.6 trillion in May. Within weeks of reaching this all-time high, $800 million was wiped off of the total crypto market cap which is a decrease of over 33%.

Before investing the time, effort & money in a cryptocurrency project, one needs to consider few factors.

Utility

Utility is one of the main factors to be considered when it comes to Volatility in crypto markets. A good crypto project should be vocal about their value proposition. This is where most projects lack. Some projects simply won’t be able to communicate their value proposition. One has to think if the project is useful and who will be supporting it before investing in it.

Let us consider the example of Dogecoin (DOGE). Going back to the past, this currency was worth $0.002 in September 2019 despite having no perceived value. Currently this currency trades at $0.26 cents. So, how did this happen? Dogecoin used its innovation here by leveraging its community as its utility to achieve this. The utility of the DOGE can be quickly understood and articulated and it also brings happiness and fund to its community.

With this ease of understanding, DOGE has gained great mainstream appeal. Also there is a low barrier to entry in terms of understanding and price.

To put it simple, how many people use crypto currencies and for what purpose mostly influence the price and volatility of the crypto coins.

Longevity

Sustainability of a project is very crucial & Project Longevity is the key to success. Before investing in any project it is a must to research about its sustainability and the revenue mechanism which can be leveraged at some point. Not all projects are sustainable during its starting phase. For example, Uniswap is averaging over $3.5 million in fees per day, with none of this value accruing to token holders. This might hopefully change in the future and if in the worst case scenario it doesn’t happen then Uniswap governance token holders have to reconsider their investment thesis.

To date, MakerDAO is one of the most profitable and sustainable projects in the entire space, ranking in over $63 million in profits in the first half of 2021.

Also it is good to check if the project in which we will be investing really assure a blockchain solution.

Longevity of a project also plays a key role in determining the volatility.

Scarcity

When there is a scarcity of coins naturally there will be volatility. For example, the number of bitcoins which will be mined has already been pre-determined. So naturally when more investors join the Bitcoin club, there would be scarcity of coins and the price will increase massively. On the other hand some coins use the burning mechanism which is actually destroying a part of the coins in supply just to raise the price of the coin. All these factors affect the volatility in the crypto market.

Volatility is here to stay!

Volatility is something which will continue to stay in the crypto market for a while. Hence, understanding these utility, necessity and long-term viability of projects is essential in the long run to make effective and informed decisions.