Attention New Cryptocurrency Investor: Every few weeks (if not less) Bitcoin corrects by 5% – 20%, as do other cryptocurrencies. Often they all do at the same time. Don’t let that worry you.
TIP: It is a lot easier not to worry if you don’t invest too much of your investable income into cryptocurrency. Consider building an average position and keeping a good chunk of your investable funds in a fiat currency like the dollar. This will help you weather the inevitable bi-weekly storms. Otherwise, this isn’t investing advice. See the disclaimers.
Here is the deal with Bitcoin (and cryptocurrency in general) in terms of volatility and “holding”:
- If you get shaken and sell Bitcoin every time it loses 5% – 20% of its value you won’t make it one month in the crypto space (you could actually not last a day or week).
- If you get shaken every time it loses 50% of its value, you might not make it a year (likely not even six months).
- If you get shaken every time it loses 80% of its value, you won’t make it for the long haul.
That is, unless your strategy involves setting stops and buying dips (in that case you are rolling the dice, but that is a fine strategy if you can pull it off), you literally won’t last in the crypto space long term.
I’m not saying that losing 80% of your investable income is a good idea. Clearly. That is gnarly, and let’s face it, if and when the bubble pops, there will be people in that position (holding Bitcoin and a few tears for a few weeks, months, years as they try to explain that someday Bitcoin will be the future again; brace for that potential relatity).
This is to say, I’m not saying holding during a potential bubble pop will feel good or will be smart. I’m saying that part of investing in Bitcoin has to include watching the world crumble down around you to some of extent.
If you want your friends and families to be green with jealously on some holidays, you need to be willing to hear the “I told you so” remarks on other holidays.
If you are holding during the bad times, you can say to others “we will see.” If you sold for a loss, then you’ll have to tuck your tail between your legs and tell them they were right (then you’ll also need to face them that next holiday when Bitcoin has potentially doubled in value or more and explain the story to every person who congratulates you).
Sometimes Bitcoin goes from $5k to $20k in a month, sometimes it goes from $20k to $13k in a week.
Which week or month is it? Are you selling at $5k to “recover your losses?” If you do, then you shouldn’t think “I wish I bought Bitcoin at $100” or “I was so close to buying Bitcoin” or whatever.
You wouldn’t have made it to this point if you are the type who will sell for a loss during a correction. Thus, you didn’t miss out on anything by not buying Bitcoin in the past.
The only people who have held Bitcoin since the early days until now are people who can watch 5% – 80% of their investment disappear without panic selling (or can quickly admit they were wrong and buy again, or have a strategy that includes buying the dips).
With Bitcoin taking profits is sensible, holding long is sensible, buying dips, setting stops, etc. All that makes sense.
What does not make sense with Bitcoin is buying high and then selling low in a panic when it dips. As, Bitcoin will dip. It will dip hard. And it will make you feel uneasy. If you don’t account for that before hand, you will be in trouble.
The Bitcoin bears are a nasty bunch and they do their best to drop the market on a weekly basis (they 1. make money by shorting Bitcoin and 2. buy more coins while others panic sell).
If you let them shake you, then you are letting them shake your Bitcoin out of your wallet and into their wallet essentially.
The more people who get shaken, the more people who make a run on the Bitcoin bank, the more people get added to the long list of names who exclaim “I had like X Bitcoins, I am so upset I sold them back in Y.”
If the bears were getting out of Bitcoin forever, they wouldn’t be sitting around on the exchanges taking profits and hunting for a lower price.
And why would a bear get out forever at this point in Bitcoin’s life? Why with futures just launching, with ETFs likely on their way, with the new wave of adoption, with all this and more… why would a bear with enough coin to crash the market pack up and go home?
The bottom line here is this: If you are a normal person, and you risked a conservative portion of your investable funds in Bitcoin (what you can afford to lose), then you need to also be willing to grit your teeth and hold through a downturn. Downturns are too frequent to not have this be part of your strategy.
Now, if you want to avoid this and still invest, then you need to take profits, set tight stops, buy the dips, and an build average position. So far that sort of tactic has been less profitable than holding, but it is notably a little more comfortable.
No tactic is fully going to avoid some emotional drama in the crypto space. However, investing a conservative portion of your income and preparing yourself to hold through the dips really helps.
The biggest mistake I made in the crypto space was when I first started investing seriously (I had been a crypto hobbyist before that). I let the 50% correction shake me. I took a loss and said “Jamie Dimon you are right, if only I had bought Bitcoin when it was $100! I was so close!” Yeah… that is the wrong attitude to have in this space. When the bears come for your Bitcoin, set a sell order for at least 50% the current price and wait. For example, when the market dips from $17 to $15, set a sell for $20k – $25k.
Likely you won’t have to do more than not look at charts for a few weeks to feel pretty darn good about yourself.
I mean, that or we enter that long term bear market and… well, this is why we want to invest conservatively and make sure we have investable income left for a rainy day (true for all investable assets). That way you can play the bear market later if need be.