Don’t Let Bitcoin’s Volatility Shake You Out
He did it again.
As bitcoin dropped by 20% from its all-time high on Monday morning, my phone buzzed. It was my friend wondering if he should sell all his bitcoin — again.
It’s the big mistake he keeps making … and he hasn’t learned from it yet.
Readers of this column were previously introduced to my friend Jordan a few years back. In 2017, he bought bitcoin at $1,250, $2,800, $7,500 and $14,000.
That was an average cost of $6,387. Bitcoin famously peaked at $20,000 that year after a 2,000% rally.
But here’s the crazy part: He lost money on his bitcoin investments in 2017!
That’s right — even with an average cost significantly below bitcoin’s peak price, Jordan still managed to lose money in 2017 … in an asset that rallied from under $1,000 to $20,000 in nine months.
Now, you might be wondering how this is possible.
It’s possible because Jordan succumbs to volatility. The market is constantly shaking him out of his bitcoin holdings.
He gets out at exactly the wrong times. If he just listened to the advice I’m about to tell you today …. he’d be up big in the past year.
Bitcoin Is 1 of the Most Volatile Assets in History
Most people don’t realize that not sticking to a plan has eaten into many investors’ profits.
Any casual observer would think investors are raking it in! All they had to do was buy some bitcoin at any point in 2020, hold on to it and cash out.
After all, the world’s largest cryptocurrency has risen nearly 1,000% from its March lows.
However, if you look past the staggering returns, you’ll notice that bitcoin is one of the most volatile assets in history.
Take a look at these spectacular bitcoin peak-to-trough drawdowns during the past bull cycle in 2017:
- December: -42%.
- November: -28%.
- September: -39%.
- July: -36%.
- May: -25%.
- March: -24%.
- January: -35%.
Even while the price of bitcoin was soaring during the 2017 mania, it was still subject to seven mini bear markets that saw the price drop over 20%.
And that volatility causes investors like Jordan to miss out on massive gains.
Most investors make the same mistake: Jordan would chase the market after a bullish run and then dump his holdings when the reversal occurred a few weeks later.
This pattern repeated itself more than a few times in 2017. It typically began when (insert Asian country here) threatened to shut down crypto markets or restrict citizens’ access.
In each of these instances, bitcoin resurrected, buyers returned and those 30% sell-offs were followed by rallies of 76%, 237%, 183%, 165% and 152%.
After selling into the latest panic, investors like Jordan would then feel their emotional pendulum swing from the fear of losing to the fear of missing out. They would then jump right back in.
Why 2021 Is Different From 2017
This time is a bit different, though.
Now, before you remind me that’s the most dangerous phrase in investing, let me give you three reasons why 2021 is different from 2017:
- Institutions are at bitcoin’s gate. As I outlined in December, hedge funds have been accumulating bitcoin for years. But new arrivals, such as the 170-year-old mutual insurance company MassMutual, mean more demand is coming.
- Global monetary printing presses will continue even as economies reopen. The Federal Reserve has given no indication of raising rates in the foreseeable future. Fed Chair Jerome Powell has openly spoken about not taking away the “punch bowl.” He wants to run the economy hot, allowing inflation to surpass the Fed’s 2% target. The surplus of dollars leads to a debasement of the U.S. dollar, to bitcoin’s benefit.
- Lastly, and most importantly, banks were given the green light to settle transactions with blockchain technology. Last week, the Office of the Comptroller of the Currency announced that banks may use dollar-linked stablecoins and blockchains for payments. This will ensure cryptocurrency’s adoption in the next few years, and is also a reality that didn’t exist during the last bull market.
There is a strong narrative under bitcoin and cryptocurrencies that should lead this bull market higher.
Pullbacks like we are seeing might be changing individual investors’ minds. But institutions that have $160,000 (JPMorgan Chase) or $400,000 (Guggenheim) price targets on bitcoin are using pullbacks to buy supply from weak-handed retail investors.
Volatility cuts both ways. If you are expecting upside volatility, brace for downside shakeout moves as well.
When you understand that, you will start seeing volatility as an opportunity to get in, not one to get out.
Editor, Automatic Fortunes
My career on Wall Street started while I was in college. I spent a summer interning for Merrill Lynch in the middle of the ‘90s bull market. I was fascinated with trading, and as a result, after college, I joined Salomon Brothers in the famed mortgage bond trading department. Later, I spent time at Citigroup working with credit derivatives. Eventually, I needed to walk away from the excess of Wall Street. That’s when I joined Banyan Hill in 2017. Now I help readers get ahead of the market and build their retirements.