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Feb 2, 2018
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Many bitcoin investors experienced a painful moment in January, following the dips in the value of the mainstream cryptocurrency. All the same, crypto investment is a volatile industry and as an investor, you should develop a thick skin to bear the losses, especially in a bearish market.
In the beginning of January, the value of bitcoin hovered around $15,000. By February 1, the value had plunged to slightly below $9000. That was a big chunk of an investment lost. However, as Harold Stark writes in Forbes, “…the price of a single bitcoin has skyrocketed from $0.06 in 2009 to a whopping $16,448 in 2017. What’s more, this unique digital currency is only scheduled to grow with time…”
Crypto investment analysts are keenly watching the critical level to which bitcoin and other cryptocurrencies plunged just a few days ago. Two major factors might have led to the losses: the new regulations by South Korea, and the declaration by Facebook that it would ban crypto-related ads. South Korea is a major player in the crypto industry and any pronouncement from its end cannot be taken lightly. In the same way, Facebook is a mainstream social media platform, which plays a big role in the way information spreads across the crypto space. If these announcements are anything to go by, investors could expect more volatility.
Growth Indicators
However, volatility will not last forever. Crypto investment is still a new field and many investors are out there to explore the industry. More companies are launching crowdsales on various crypto platforms. Such advances have seen other virtual currencies such as Ethereum and NEO surge in value.
Stark says, “The success of the cryptocurrency market depends unilaterally on the number of startups that are willing to push the boundaries of orthodox thinking and use blockchain technology to answer the questions that matter. Bitcoin, when it was founded, was no more than a random startup. Today, it is the most expensive and popular digital currency to ever dominate the market.”
How to Stay Calm in the Face of Losses
To begin with, bitcoin has been branded both a fraud the world’s future currency. Owning such an asset could throw in a mix of both optimism and doubt at the same time. For instance, on December 22 when bitcoin dipped by 30 percent, an investor expressed deep emotions on Reddit. The post read, “I just refinanced my house to get in. I’m freaking out.”
Such is the regular cycle of digital currencies that can eat into your nerves. According to Jim Smigiel, the CIO of absolute return strategies at SEI Investments, “With other speculative investments, like private equity and venture capital, you can’t check your phone every five minutes. However, with crypto investment, Smigiel says, “You’re able to track the minute-by-minute value of it…Looking at something with such high volatility all the time is not conducive to an investor’s mental health.”
With that in mind, here are proven ways to help you keep calm on the crypto investment roller coaster.
Focus Elsewhere
The volatility in the crypto market is part of what makes the digital currencies irresistible.
“We know from social psychology that the best way to get people hooked on something is to give them a reward on a very uncertain time frame,” says Willemien Kets, University of Oxford associate professor in the Department of Economics.
Kets advises investors not to fall into the trap, as checking the value of the digital assets every time is unproductive.
“You can’t do anything about the price movement itself,” she says.
Instead, Kets suggests that investors should decide on a price point at which they can sell, to avoid further losses if the asset continues to plunge. For example, as an investor, you can set your price point at $10,000 and set your phone to alert you when the asset reaches that threshold.
According to Jack Tatar, co-author of “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond,” constant phone checks are pointless.
“It’s very hard to realize the gains you see on your phone,” he says. “These markets are not as liquid as the stocks and bond market. You can check your phone and see you’re up to $30,000 but if you want to realize that gain, you probably won’t be able to do that.”
That is possible because cryptocurrency transactions can take a while to complete, during which time the value could change significantly. For that reason, Tatar advises investors to look away, albeit difficult for most people, including himself.
Buy to Hold (or HODL)
When you buy and sell in a dipped cycle, it is easy to miss the bigger picture of virtual currencies and the blockchain technology on which you trade.
“There is no question that digital currencies are the future…you should be prepared to own it for years,” says Ric Edelman, founder and executive chair of Edelman Financial Services.
Edelman says he decided to hold bitcoin for more than ten years and it paid off. “I have watched it grow from $1 to $1000, back to $200 and then to $16,000,” he says. Even so, Edelman acknowledges that some people cannot tolerate such ups and downs.
“If owning this asset is causing you to stare at the ceiling at night, you shouldn’t own it…there is more to life than money,” the financial advisor says.
On the flipside, it’s hard to expect people to remain rational when it comes to crypto investment. Many people who buy bitcoin may not fully understand what they are buying. This is according to Peter Ayton, a student of behavioral decision theory at the City University of London.
“When you have something as volatile as bitcoin, it doesn’t lend itself to long-term strategic thinking,” says Ayton.
Don’t carry the eggs in one basket
It is always important to diversify your crypto investment beyond one cryptocurrency. This is contrary to the notion some people hold that investing in multiple crypto currencies might make one less anxious.
However, the crypto investment field is growing, and many more investment firms are looking for suitable points of entrance. Currently, the market has some 2000 digital currencies in circulation. Some investment firms are thinking of initiating index funds for digital currencies. For instance, Grayscale, a cryptocurrency firm, seeks to launch what they call “a basket of digital currencies.” This will enable investors to spread their money across five crypto currencies.
According to Edelman, “It’s so early; we don’t know which cryptocurrencies will survive.”
Invest only what you can afford to lose
Tatar advised that people must restrict their crypto investment, as in how much of their investments should go to digital currencies.
“You’re seeing too many people jumping in and betting the ranch, and just saying ‘yee-haw!’ ….They are not disciplined enough to realize they have to stay within their asset allocation models,” says Tatar.
The co-author continues to advise investors to consider “rebalancing” their crypto investment because digital currencies have a tendency to change value unexpectedly and rapidly.
“If you’ve invested 20 percent of your portfolio into bitcoin, and all of a sudden you check and, lo and behold, your bitcoins have increased so much that they are now 35 percent of your portfolio, you can rebalance and go back to your asset location,” says Tatar. “That should protect you from some of that volatility.”
However, the anxiety is felt on both sides of the divide. According to Smigiel, it’s not just the owners of the digital currencies that experience the stress. Equally anxious are people who have not had the opportunity to buy any cryptocurrency such as bitcoin, Ethereum, or ripple.
“We also see the anxiety on the flip side—the people who feel they are missing out….And so you are anxious either way,” says Smigiel.
Final Thoughts
Cryptocurrencies are highly experimental digital assets. As an investor, you have no idea what might transpire in the end. You may get value for your money or you might lose big on the investment. If you are going to test the waters of crypto investment, remember to do your research, study the graphs, and learn the price trends. More importantly, be cautious.
Featured Image Courtesy of Getty Images
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