Understanding the Jan. 2017 Cryptocurrency Correction (Not Crash) From the Perspective of a Long Term Holder
After Bitcoin’s rapid rise from $1,000 to nearly $20,000, and then a rapid rise of altcoins following that, cryptocurrency is seeing a correction (not a crash). That isn’t fun, but it is common.
Essentially the short history of cryptocurrency is a story of big gains followed by almost equally as big losses (almost being the key here).
To say that this is stressful for those going long is an understatement. Yet, unless you are an expert trader, with ample time to be in front of your trading desk, with a good grasp of TA, and with a lot of luck… you don’t have a ton of options aside from holding through crypto corrections (be they 25% corrections or 80% ones) if you want to be invested in cryptocurrency.
Bitcoin has, since its biggest gains in May 2017, corrected a few notable times. For example (in rough USD prices on GDAX):
It went from $1,000 to $3,000 and back down to $1,800 in June. It went from $1,800 to $5,000 and then back to $3,000 in September. It went from $3,000 to $7,900 and then back down to $5,500 in November. It went from $5,500 to $12,000 and then back down to $8,500 (again in November). Then it went from $8,500 to almost $20,000 in December… then went back down to $9,200 in Janruary.
That last ramp up from the $8ks to nearly $20k was in part inspired by the announcement of futures trading, and in part a result of many new adopters entering the market (especially after the US went home for Thanksgiving and told their families about their epic gains since the summer). Some hoped that the bullishness would be sustainable, but for Bitcoin it wasn’t.
After failing to reach $20,000 Bitcoin gradually started falling back down almost to where it started in a wave-like pattern with each wave seeing lower highs and lower lows.
Still, there was a lot to be excited about. The second Bitcoin slowed down, altcoins (coins that aren’t Bitcoin) heated up and outpaced gains that took Bitcoin a year to make in only a matter of weeks.
This was awesome, and that altcoin boom attracted even more people to the market, however that awesome alt-fest it was also the final part of the set-up for the current correction.
There was no one thing that caused the correction, instead it was death by 30,000 tiny cuts.
There was all the new money being invested a little too quickly (which leads to weak hands; those new holders not ready for a correction like this), the latest round of Bitcoin Cash drama (the first November correction was also due to that), there was XRP not being added to Coinbase (crypto loves rumors), there was CoinMarketCap pulling South Korean exchanges, there was ban-like news from China, South Korea, and India, there was the bad news bears of the Media talking about “the bubble,” there was futures traders going short, there was Whales going short, there was people taking gains, etc, etc.
Then, on top of that, there was an expected and yearly January correction manifesting (historically mid-to-late January has been pretty bad for crypto). See the image below.
Add all that up and you have a pretty depressing market for long term holders on your hands (and a tricky market for range traders and shorts honestly).
With that said, long term holders can only be called by such names if they are willing to hold through corrections this deep and deeper. Literally, it is impossible to go long and avoid corrections like this. Historically, literally impossible.
No one who had crypto before the Silk Road days still has it unless they held through a giant correction and two year long bear market. Never mind those holding since the earliest days. Heck, no one who bought crypto at the start of 2017 still has it unless they held through some really harsh corrections (if you look at altcoins, there were some brutal corrections out there that didn’t even start to give back until December).
If you consider that, then you can see the reality is that there isn’t a ton of people who got epically rich from crypto, and those who did either traded very well or sucked it up and held through corrections like this one or worse!
Holding through corrections is stressful, but what else can you do but wait and/or add to your position?
If you want to be invested in cryptocurrency, you either have to get really good at timing trades, or you have to accept that holding through times like this is part of the deal. Meanwhile, if you want to manifest long term capital gains (and thus pay a lower tax rate on your capital gains), you literally have to hold through this sort of thing.
Thus, if you want to go long, you can’t panic too much in the moment. Instead, you’ll likely want to use those common corrections to add to your position if you do anything at all.
It is so much easier to FOMO buy than to buy when everyone on TV says, “It’s a bubble, it’s a crash, it’s a bubble crash, no wait, this is going to end badly”… yet, historically, it has has been way more profitable for long term investors to buy during corrections and to live with the fear than it has been for them to buy the top and have to hold through an additional cycle to see gains.
So, where do you buy? Great question. No one knows (but do feel free to check out tradingview.com). One can point to support levels all the way down from $11k to $1k. Each level one would expect buying to ramp up. The last wave the price bounced off $9,200. Who knows what will happen moving forward.
The only general rules are this: Don’t spend more than you can afford to lose and buy the dip (and since you want to buy the dip, you need to never exhaust your bankroll).
NOTE: One extra rule. Altcoins tend to follow Bitcoin’s price but tend to correct harder than Bitcoin (and then tend to bounce back quicker). So, I won’t get into it all here, but there is a whole set of rules you need to consider if you are holding a given alt (the general rule being, expect deeper corrections than you see with Bitcoin, but quick rebounds on a good day, but a bear market on a bad day even if Bitcoin rebounds).
General rules and notes aside, the basic logic is simple:
- If this is the end, then all the holders are about to take a big hit. <—- Not impossible and really bad for holders.
- However, if this is like literally every other correction, then it is really just a matter of waiting days, weeks, months, years, or whatever for all time highs to be exceeded (most likely weeks or months). <—- Likely and good for holders.
At some point in the not so distant future there is a very good chance that holding (and adding to long positions) will pay off. When and if it does pay off, as long as you held more than a year, you’ll be enjoying not only your profit, but your profit at the long term capital gains rate (the shorts and the volatility traders will not enjoy this; in fact they will be giving back part of their profits while longs hold in the form of taxes).
Things that are good like big long term crypto gains don’t come easy (to be fair, short term gains aren’t easy to get either), crypto has never been known to make it easy on anyone except the temporarily lucky.
This typical January correction was intensified by a range of factors, but it is none-the-less rather common. Since corrections are common, you need to have a strategy in place. If you are a long term investor, its hard to see how that strategy can be anything other than hold / look for buying opportunities to add to your position.
NOTE: The image at the top of the page shows the recent Bitconnect crash and the current Bitcoin correction. The Bitconnect crash shows what a bubble pop looks like when a Ponzi falls apart. The Bitcoin chart shows what an asset’s chart looks like when it gets ahead of itself and enters a correction period. As you can see, it is not the same thing at all (although if this correction continued all the way down to say $1k, then we could call it a crash; so we could say Bitcoin had one crash before in late 2013 – early 2014, but honestly I consider that a correction as well).
NOTE: I don’t hold all of my cryptocurrency long, instead (and partly for the purposes of the site) I do a wide range of things with my crypto in terms of trading and investing. With all that said, I am and have been holding a range of cryptos long and have been adding to my position during the correction. Also, in-line with the article I have intentions to buy more in the case of a further correction. This article isn’t advice as to what you should do, but its worth noting I am putting my digital money where my mouth is.