Minimizing Volatility when Saving in Crypto
Now, if you’ve found this article, it likely means that you have some interest or curiosity about the seemingly exotic realm of cryptocurrency. After all, crypto wasn’t even thought of 40 years ago (the first cryptocurrency is only 10 years old!) and we know how intimidating crypto can be. Thus, we strive to simplify your experience and bring it into a mainstream focus (which we hope to do with this article!) But, before we jump right in, we want to bring you back to the basics, that is, right back to the foundation of financial markets around the world and the simple valuation of an asset.
So, you might be wondering, what is an asset? Well, It is something that gets its value from all of the contractual or ownership claims against it. Basically, this means that it gets its value based on the public’s perception of what it’s worth (i.e. the current value and perceived future value of the asset). For example, when you buy a share of Coca Cola, you believe that the asset (or the share itself) is fairly priced based on all of the knowledge that you have on the Coca Cola company. When new information is made available, the price will go up or down depending on whether the public perceives it to be positive or negative. And the best part, the value of any asset (or share) on every exchange works the same way! That’s right! From the New York Stock Exchange to the Bitcoin Exchange, the value of the asset will always reflect the public’s collective beliefs. With this similarity, the same tools that have been used for decades on major stock exchanges all over the world, can still be used in a similar way within the ever-growing crypto markets of today! Of course, with all their similarities, there are some major differences.
Volatility, for one, is huge in crypto (we should note that it is a factor in all capital markets, but is much more prominent in the crypto realm!) and is the reason we have chosen to dedicate an entire article to the topic.! So, fasten your seat belt and get ready because we’re about to give you a sneak peek into the savedroid solution (to volatility that is!)
Let us clear one thing up… as we’ve already said, the crypto market is volatile. Wildly volatile, in fact! But what exactly do we mean by this volatility? Well, volatility refers to the question of how much we can expect the price to change over the course of time. If the price today is 100 for example, how much can we expect the price to change tomorrow? Can 110 or 90 be expected or is something completely different more likely? What about a change in price from 100 to 200 or conversely down to 50 in just one day? That is, how likely is it for you to double your money or lose half of it in a single day? These are all questions that pertain to volatility across every capital market and, as it turns out, cryptocurrencies have much greater volatility than conventional fiat currencies such as the Euro.
For example, if the Euro drops in value by 20% over the course of a day, we would have a breaking news story comparing it to Black Monday in 1987. However, if Bitcoin changes in value by 20% in one day, it would never even make the smallest of news broadcasters. In fact, Bitcoin shifts like that happen so frequently, it’s just business as usual in the crypto world. But, we promise, there’s an upside! Volatility in the crypto realm has actually been decreasing over recent years. Of course however, volatility is itself volatile and spikes up from period to period, but it is a start!
You might be wondering, what point is all of this trying to make? Well, this is where it gets fun! At savedroid, we work to not only make saving fun but also safe (that is, safe from volatility!). Now, as with any market in today’s world economy, it’s not a 100% science and predicting it with 100% accuracy is not even something the great Warren Buffet himself is capable of. However, what we can do is reduce the volatility of the returns (which is just a fancy way of saying we reduce the risk!).
So, how do we do it? Excellent question! The first thing is none other than the importance of always diversifying your portfolio. This means to diversify your assets across various areas into ones that are anything but perfectly correlated. Now, if you’re not the finance type, that might seem a little too abstract. Basically, what is means is that when you are creating a portfolio of assets, you should always choose the assets in such a combination that the factors that affect one asset won’t affect another asset in the same way. Even better, would be to choose those assets with no correlation at all, so that the effect on one has no effect on the other! With this is mind, what makes the crypto market of today so compelling is that it is in fact, highly correlated!
We at savedroid understand this high correlation and are constantly working within the crypto realm to diversify and reduce this risk as much as we can. But don’t fret, that’s not all that we do!
The entire nature of our product (i.e. the platform we’ve built and the saving opportunities that we offer) facilitate this reduction in volatility too! We use two strategies: portfolio diversification and incremental saving, as two techniques in risk reduction. So, what do they mean? For starters, diversification works across different assets, letting the volatility of one asset counteract the volatility of the other. If uncorrelated, the two volatilities “cancel” each other out and you’re left with a much more stable portfolio! In contrast, incremental savings can work with a single asset by letting its volatility counteract itself (cool, right?). As a result, you end up with something comparable to asset diversification, but instead of achieving it through a combination of different assets, the asset itself achieves it overtime. If the price yesterday was slightly lower and today it is slightly higher, while at the same time you bought a little bit of the asset yesterday and a little bit of the asset today, your net result is the average of the two prices (which is a whole lot less volatile!). Imagine then, that you repeat the process again and again, you’ll end up with a pretty nice-looking curve!
But wait… we didn’t just stop there. In addition to the diversification and the incremental savings, we have also developed an AI system that completes the entire package! It works to pick the best coins for our portfolio, in the optimal quantities, such that savings can be realized! It tracks your typical return and volatility, but we take it even one step further to track the volatility of the volatility. This means that there are time periods when volatility is very low and then there are periods when volatility becomes much higher (and the process continuously repeats!). We realized, in a market as volatile as the crypto market, just tracking the volatility alone wasn’t enough! Consequently, our AI monitors this volatility of volatility as well as many other different kinds of cool things, to constantly scope out the market situation (of course, while always respecting the market valuation given to currencies in real time). If you’re interested to learn more, check out the link to this video explaining everything our AI can do!
If the explanation above isn’t enough to convince you, take a look at a simulation we conducted illustrating the reduction in volatility of our incremental saving strategy. Here, we either made one-time 1000 Euro purchases of crypto currencies or distributed the same amount of money over one year, saving 2.75 Euro daily.
As you can see, the volatility of incremental daily savings is much smaller than if people purchase all the crypto at once! Now, that’s the savedroid solution!
