What to do when the market moves against you?
The market has moved against us. The price of a Bitcoin has gone from its July high of $12,500 to $8,339 today. That’s a drop 33% on the world’s largest crypto currency.
The rest of the market, excluding BTC (altcoins), has gone from a market capitalization of $127B (July high) to $71.5B today for a down move of 38%.Some altcoins we’re watching, even good projects, have lost as much as 70% in the past three months.
I know this sounds a little crazy but this is actually good news for the prudent crypto investor. In this article I will explain:
- A market phenomenon known as the Pendulum Effect and how it impacts the crypto markets
- Some factors that have contributed to the recent drop in crypto prices
- What actions you can take to maximize the upside and minimize the downside in this current market
The Pendulum Effect
Public markets move like a Pendulum. During a bull market (like in crypto 2017) investors were overexcited and irrationally bid up prices beyond a rational valuation, because they don’t want to miss out on the action; and believe prices will continue to go up the way they have been.
When markets begin to cool down and start to correct, the momentum will reverse course and move in the counter direction with equal force, again well past where the market equilibrium price should be.
So in a bear market, investors will continue selling out of fear that things will go to zero. When this happens, investors will sell off assets to well below what the asset is worth. We saw this in 2018 when Bitcoin hit a low of $3,242. That’s also around the time when we released a major buy signal to our subscribers for Bitcoin during our December 2019 issue.
Don’t Panic, Nothing Has Changed
The fact is, nothing, absolutely nothing, has changed. Much of crypto price today is sentiment driven. We saw a massive run up in the crypto markets from February to June of this year. Much of this was completely unsubstantiated and happened for no reason at all other than a shift in investor sentiment. Here we saw another example of the Pendulum effect.
During that time investors were excited about a few things: the announcement of Facebook’s Libra (legitimizing blockchain and prospects of mass adoption) and prospects of major institutional money moving into the space, with solutions like Bakkt’s launch of Bitcoin Futures and Fidelity’s Digital Assets custody services… along with other seemingly positive news.
The reality is institutional interest in crypto will be a slow and steady process that does not happen overnight just in the same way crypto mass adoption will not happen overnight. Institutional investors have to be able to justify (to their investors) investing in volatile assets like Bitcoin, and they simply don’t have a deep enough understanding of it yet in order to justify it to their investors.
Unfortunately most of the market doesn’t recognize this and it only became widely apparent when Bakkt launched last week and the demand was, well, lackluster. This negative catalyst, combined with the undercurrent of Facebook’s Libra facing some regulatory speed bumps is largely what is responsible for the recent price drop.
We will likely see the pendulum effect of this for a few more weeks and things could get worse before they get better.
But this doesn’t change anything on a fundamental level. Nothing has changed with Bitcoin and nothing has changed with the projects that we have rated positively on. If something HAS changed, our research team will be on it, and you will be the first to know about it.
Don’t Fear the Bear, Feed It
We’re almost back to where we were in December 2018 when the market reached an all time low. I know, it’s scary, and your first reaction might be to panic, give up and sell for a loss. But that’s exactly the opposite of what the smart investor does. They feed the bear, they don’t fear it.
Consider this, If you walked into your local supermarket one day and all your favorite items were on sale, would you go home, bring back what you’ve previously bought, and ask for a refund? No, you buy more and you stock up!
Savvy investors buy LOW, sell HIGH. Not the other way around.
When we rate projects we go through all the factors that may affect the demand and the supply of a particular coin. This allows us to see if there is evidence that the price might go up in the future. If there are no changes in the fundamental factors, then the only thing that changed is investor sentiment. And at the moment investor sentiment in Bitcoin affects all coins in the market as a whole… but it doesn’t change the fact that a project we’ve rated highly is still a good project.
While there is nothing you can do about the initial price you paid for a coin, there IS something you can do to change the average price you paid for a coin.
The way you change your average price is to buy more of the coin to lower your cost basis (the average price paid for a unit of the asset).
Here’s how the math works:
Initial investment – lets say 2 months ago I invested $100 in CoinX at $0.10 per coin, then I would have purchased 1000 units of CoinX at an average price of $0.10.
Now let’s say today the market turned south and the price of CoinX plummeted to $0.05. My portfolio would be down 50% at this point (assuming this is the only coin in my portfolio). And I would have to wait for the coin to gain back 100% for price of CoinX to go from $0.05 back to $0.10 (what i initially paid). And this would actually only allow me to break even.
Again, the assumption is that short-term market sentiment has pushed the price down. In this case I would want to double-down my investment to lower my cost basis.
I like to use the same investment amount (in $) that I used for my initial buy in. So here I would buy another $100 worth of CoinX, this time at $0.05 per unit adding another 2000 units of CoinX to my portfolio.
So now, altogether I have paid a total of $200 for 3000 units of CoinX. But the average price I paid for CoinX is now $200/3000 = $0.066. I just brought the average cost of my investment in Coinx down to $0.066 from $0.10.
So now once the market turns around then I only need CoinX to go up 33% from $0.05 to $0.066 in order to break even. Anything beyond that is profit.
Personally for me I only do this when two things are true:
1) nothing has fundamentally changed in the assets I have invested in and
2) the price has stabilized (for at least one week) at 50% or lower of the initial price I paid. If it drops 50% again then I do the same thing again.
This is what I call feeding the bear.
I Love Bear Markets, Because They Create Opportunities
Bear markets are not so good for me as CEO of a major crypto media and research company – traffic is down, subscriptions are down, and people who are not used the volatility get scared and lose faith.
But as a crypto investor who bought his first Bitcoin six years ago, I love bear markets.
In bull markets there are far fewer discounts on the market. And it’s very, very hard to find investments worth the price they are trading for. It takes a lot more work to find great discounts in a strong bull market. All I can really do is SELL and take profits on previous investments.
But in a bear market, almost EVERYTHING is on sale and most investment prospects become more attractive. And it’s also much easier to get the truth out of project founders and management teams as they are much more open to feedback.
Over the past six years that I have been a crypto investor the only thing about crypto that I can reliably depend on is that when prices suddenly surge they eventually come back down. And when prices plummet rapidly, they eventually will come back up (for good projects, that is).
But between all these bear and bull cycles, usually nothing major fundamentally changes with the projects I have invested in because I spend the time up front to do all my homework… before I move into an investment… and I make sure that it has the potential to survive the long haul through both bull AND bear markets.
I like investing in teams that understand these cycles and won’t be discouraged during the bad times, and who will put their heads down and keep building. This is why we like investing in projects that have real impact for the long term and teams with clear visions.
This is also why SIMETRI’s Digital Asset Report ratings are based on SURVIVABILITY in the long run.
I truly hope this information helps you become a more educated and successful crypto investor.
Please note: I am not a registered investment advisor and the statements made above are only my personal opinion and for informational purposes only. You should also do your own research. See full disclaimer below.
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