almost 3 years ago • 4 mins
It’s fair to say bitcoin’s had a tough time of it recently, with its price falling more than 40% from all-time highs. But whatever the critics might say, this isn’t the beginning of the end. In fact, it might be an opportunity in disguise.
Big price moves tend to have a cause, and you don’t need to look far to find the culprits in this case: Elon Musk’s concerns around the environmental challenges posed by bitcoin mining, China’s promise to crack down on miners, the US Treasury’s plan to require investors to report transfers above $10,000 to the tax man – the list goes on.
But when it comes down to it, the only question you have to ask yourself is whether the original investment case for bitcoin has changed. And here’s why, for my money, it hasn’t.
Bitcoin was created to rebuild a fairer, safer, more accessible, and more transparent financial system. And sure, it isn’t perfect. But at its core, it still has the potential to do exactly that.
Looking at the events unfolding around the world today, preoccupations around corruption, inequality, and inaccessibility aren’t going away anytime soon. And while bitcoin may not have all the solutions now, the fact that it presents one of the most viable alternatives to the current system means there’ll surely be demand for it.
Investors tend to fall in two camps: those who see bitcoin as a good hedge against rising prices, and those who don’t. I fall squarely into the latter: there don’t seem to be many better alternatives when it comes to protecting yourself against runaway inflation and the devaluation of traditional currencies.
Those who disagree might point to last week’s sell-off as evidence that they’re right. But that sort of misses the point. Firstly, we haven’t seen the kind of out-of-control inflation that bitcoin should really protect you from. And second, it’s not exactly rational to go off one week where higher-than-expected inflation and a drop in bitcoin’s price happened to coincide. And not just because it’s one data point: bitcoin’s driven by a wide variety of factors, and higher inflation – which was arguably already reflected in the price – might not have been the driving force.
Bitcoin is volatile, it has always been volatile, and it’ll probably remain volatile for quite some time. If you want to invest in the cryptocurrency, you’ll need to learn to live with that.
Last week’s 40% fall was certainly scary for newcomers, but it’s not exactly unprecedented: long-term bitcoin investors have had to withstand losses of more than 80% four times since 2010. In fact, it’s pretty typical of bitcoin to follow up an explosive price rise with a period of falling prices. If you’re a bitcoin investor, you just have to accept the scary “paper” losses and remind yourself that you’re in this for the long term – or else run the risk of turning them into real losses.
Like we say, bitcoin’s high volatility isn’t a secret. So if it was an issue for certain institutional investors before, last week’s collapse might have just confirmed that they won’t invest.
But for all the others, it might’ve presented an interesting opportunity to buy in on the cheap. And there’s certainly been one group circling around: hedge funds, which reportedly haven’t been shy about buying the dip. So while it might not have changed any minds, it might’ve actually sped up the adoption plans of some of crypto-inclined institutional investors.
If you do believe in the long-term thesis for bitcoin (which, as we’ve seen, hasn’t fundamentally changed), any price drop should be seen as an opportunity to buy in – providing you only risk as much as you can afford to lose, of course.
Now, the main issue with such a volatile and sentiment-driven asset like bitcoin is that there’s no way of knowing whether prices have reached a new low, or how quickly they’ll recover. Anything can happen in the short term – including another substantial drop in its price.
But you could, for example, define a price level at which you’d buy more, making it easier to act if and when prices reach those levels. Establishing pre-defined rules is a great way to play down the negative influence of your own emotions, which might push you to take the wrong decision at the wrong time.
For those who want an even more passive approach, meanwhile, “dollar-cost averaging” is another smart way to profit from these volatile periods. In other words, just invest the same dollar amount at intermittent periods of time: it’ll mean you buy more when prices are low, and less when they’re high.
Happy HODLing, Finimizers 😉
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.