The word volatility is typically received as a negative by financial circles just the same way the name Lionel Messi is received in Brazilian favelas, yet volatility historically presents some of the greatest opportunities for gains, especially in the crypto markets.
The crypto market experiences much greater price oscillations on average when compared with traditional markets, such as equities, bonds and Treasury bills. In 2021, the benefits of volatility were on full display:
Market proxies like the S&P 500 exchange-traded fund trust (SPY) climbed 27%, while Bitcoin (BTC) rose a whopping 140%!
Of course, the story is darker in 2022, but veteran Bitcoin investors did not find Bitcoin’s unceremonious drop from its high to be a surprise; in fact, crypto winters have historically seen Bitcoin’s value drop by over 60% at least three different times in the past, before rising again to see new highs.
The nature of volatility is that the highs are very high, and the lows are very low. However, in many financial circles, they only focus on half the sentence — the latter part is highlighted, and the former is tucked under a blanket and hidden in the back of a dusty cabinet.
The simple truth is that volatile conditions can provide some of the best risk-to-reward opportunities in the market, but investors need exceptional risk management skills and/or professional help to consistently reap the benefits of these opportunities.
“Volatility is the price you pay when investing in assets that give you the best chance of reaching long-term goals,” Gage Paul, a certified financial planner shared with a popular financial publication. “It is expected and could be viewed as a cost in meeting those goals.”
Let’s see how volatility aided Cointelegraph Markets Pro‘s proprietary data algorithms to trade in 2022.
Over the last year, volatility returned to the crypto markets, pushing BTC as low as $15,500 — a drop of roughly 70% from Jan. 1, 2022’s $47,800 valuation.
Altcoins have swung even more dramatically — a phenomenon that has helped Cointelegraph Markets Pro’s quantitative algorithm, the VORTECS™ Score, post extraordinary results in automated live testing.
This chart from Dec. 15 illustrates the results of the VORTECS™ Score’s performance since the start of 2022. At the time of publication, the return on investment (ROI) of the top strategy is now over 176%.
In a score-based testing scenario — for example, Buy80/Sell75 — the algorithm buys a digital asset when the VORTECS™ Score goes above the first threshold of 80, and sells it when it falls below the second threshold of 75.
Without employing fancy rebalancing techniques, but simply dividing the portfolio between all assets that currently require an investment, the algorithm has delivered a return of 176% for its highest-performing testing strategy — Buy85/Sell80.
For comparison, BTC has dropped by roughly 70% since Jan. 1, 2022, and an evenly-weighted basket of the top 100 altcoins has dropped even lower.
The only reason the VORTECS™ Score can deliver outsized returns like this is because crypto markets are volatile — presenting multiple entry and exit opportunities in a much shorter timeframe than usually enjoyed by traders in traditional financial markets.
That may be partly a function of the 24/7 nature of crypto trading, but it’s also partly because the risk tolerance of cryptocurrency investors is generally agreed to be significantly higher than that of Wall Street CEOs.
So, while volatility comes with well-known downsides, including the risk of total and permanent loss, it also has major potential upside for traders who have strong research skills.
See how Cointelegraph Markets Pro delivers market-moving data before this information becomes public knowledge.
Cointelegraph is a publisher of financial information, not an investment adviser. We do not provide personalized or individualized investment advice. Cryptocurrencies are volatile investments and carry significant risk including the risk of permanent and total loss. Past performance is not indicative of future results. Figures and charts are correct at the time of writing or as otherwise specified. Live-tested strategies are not recommendations. Consult your financial adviser before making financial decisions.
All ROIs quoted are accurate as of December 27, 2022.