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Tag: cryptocurrency
Bitcoin and Crypto Ready to Rip
Get ready for the coming Bitcoin bull run.
Bitcoin: The Bear Market Is Here
Are we in a bear market? I asked that question when Bitcoin (BTC) dipped below $30,000 back in July last year. If so, it would have been the shortest bull market in Bitcoin’s history. It used to be you could tell by the four-year cycle. But according to the four-year cycle, the bull market should have lasted at least into September and maybe November.
Then between August and November, Bitcoin (BTC) rallied to a new all-time high (ATH) of $69,000 on November 10. Maybe the four-year cycle was back. Many experts thought it would go above 100K by the end of December. Instead, it dropped. At times it would rally but still not get anywhere near the high in November. It would drop again, and rally again. The timing, one could argue, followed the four-year cycle.
I wrote a post earlier explaining why I think the four-year cycle may be dead. If it’s not dead, it certainly does not look like anything in the past. That being said, from November on is when we would expect a bear market. It could also be because traditional markets are down, inflation, supply-chain issues, the war in Ukraine, and all of that together seems to be pointing to a recession.
I came into crypto in a bull market. Now, whatever the cause(s), it looks like I’m going through my first bear market. Strategies have to change. What do you do with your crypto in a bear market? Everyone’s situation is different, so I can’t tell you what to do. I’ll let you know what I’m doing.
Keep in mind, though, I am not a financial advisor. Everything in this article is for information or entertainment purposes only. Always do your own research.
The Bull Is in Hibernation
I’m going to skip over discussion of how the economy in general is struggling. We all know the reasons. It’s not just affecting the United States but the entire world. That obviously makes people less willing to invest in anything, so we should not be surprised at the recent downturns in traditional markets, Bitcoin, and Altcoins. Every market is affected. But there are some factors unique to Bitcoin that are affecting it on top of the general state of the economy. That is what I will focus on.
Opinions from experts vary on when the bear market started. If you believe the four-year cycle, it started on November 11. For me (in my amateur opinion), the moment I switched from “maybe” to “definitely” bear market was the recent crash of LUNA and UST. It totally wrecked some people.
But before I get into that, when people experience an extreme financial loss, their minds can go to a dark place. I don’t want to use the S-word, because some algorithms don’t like it, but it has happened with every stock market crash. If you are thinking of harming yourself, please talk to someone. The National Suicide Prevention Lifeline is available 24/7 at 1-800-273-8255. No matter how bad it looks, money can be replaced. Your life cannot. Don’t confuse your net worth with your self-worth.
I don’t mean to make anyone feel worse than they already do. But there are important lessons we can learn from this experience. I’ll talk about my experience with the Luna crash, and then get into lessons for moving forward. I think the most important lesson is you are not your money. You are not your investments. You are not your portfolio. You are a child of God, a unique human being. Don’t ever forget that.
The Fall of LUNA and UST
Terra Luna (LUNA), a recent top ten cryptocurrency, crashed. Its stablecoin, US Terra (UST), crashed with it. And when I say crashed, I mean they both went to nearly zero. Tens of billions of dollars in market capitalization just vanished in a few days. Quite a few people lost money from both LUNA and UST, because they worked in tandem. The fate of one was directly tied to the other. Some of my YouTubers are saying it was market manipulation. I can’t confirm that, but I wouldn’t be surprised. Now that big money is buying crypto, manipulation is always possible. There’s another reason never to invest more than you can afford to lose.
Some people invested way too much in it, and it wrecked their portfolios. Some even lost their life savings. In a way it is understandable. Stablecoins are supposed to be the safe play, and it was possible just a month ago to get 20% interest on UST. So naturally people thought this was a safe investment with a guaranteed return of 20%. Who wouldn’t take that?
But if your portfolio got wrecked, or you lost your life savings, that means you put much more into LUNA and/or UST than you should have. But don’t despair. Whatever you lost can be replaced. You can come back stronger if you take the lessons of this experience to heart.
My Experience with LUNA
I dipped my toes into LUNA and UST. I bought LUNA at about $52. Within two weeks it was up to $92. When it reached $104, I should have sold half of it to make back my investment. Then what happened to the other half wouldn’t have hurt. Of course, if I knew what was coming I would have sold all of it.
But I not only held, I bought more, because when you see it going up like that and everyone in the crypto community is high on the project, you think it will keep going up. There was a certain minimum I wanted to have for my portfolio, and I had it. Yay!
On May 9 LUNA started crashing, from a price of $64 to now less than a penny.
It was a top 10 crypto in market capitalization. Now, I don’t know where it is in the rankings, and I don’t care. UST was put out by the same organization, Terra Luna Labs. I tried that, too.
My Experience with UST
I wanted to take advantage of the 20% return on UST, but I had to do some research to find out where and how to do it. UST is a stablecoin backed by LUNA. In case you don’t know, stablecoins are cryptocurrencies that are designed to keep their value at $1.00. They may fluctuate a fraction of a penny, or even a penny or two. But if it’s working properly, the price will always come back to $1.00. It should have been a safe play.
When I first saw LUNA and UST dropping, I did not realize how bad it was. I saw UST at $0.89, obviously much lower than it should have been.
This has been known to happen occasionally with other stablecoins, but with them it was temporary. I bought a little, figuring when it got back to a dollar, I could make some profit. But a little more research showed me just how much trouble they were in, so I sold at $0.70. Even though it was a loss of 20%, it was the right move, because UST is now trading at less than a dime.
I wasn’t able to sell my LUNA. Every time I tried, the order would not go through. That can happen in a crash, because in order to sell you need a buyer. Who wants to buy something that is dying a quick death? Keep that in mind when you do your risk evaluation.
Many crypto experts are doing autopsies on it. To listen to them now, it should have been obvious this crash was coming. However, only a handful of experts predicted this would happen. Let this be an object lesson that investment always carries some risk, so NEVER INVEST MORE THAN YOU CAN AFFORD TO LOSE.
And the problem is bigger than LUNA and UST. In the same time LUNA dropped to zero, the whole crypto market lost over $300 billion, with Bitcoin dropping 15% from before the crash.
A Little Hope
Do Kwon, the founder, is trying to fix LUNA and UST and bring it back, and he seems to want to find some way to help investors who got wrecked. That means there is still a chance people can recoup their losses and even make a profit if they are patient. But I don’t have the same confidence in him that I did before the crash. Whatever he comes up with, I will probably stay away from. But if he offers a way to reimburse some of my losses, I’ll take that. There is talk of a “new LUNA” that will include an airdrop to those held the “old LUNA” before the crash, so maybe we can still recover something.
Regulation Coming
There is one more issue I need to address. LUNA and UST may not recover, but the crypto market almost certainly will. It has survived much worse than this. What concerns me more is bad regulation that could come in the wake of this. Treasury Secretary Janet Yellen is calling for sweeping federal regulation of stablecoins. SEC Chairman Gary Ginsler wants to call almost every crypto a security, so he can regulate it. He has already said stablecoins are securities, which makes no sense. And of course he is in the spotlight with the SEC’s lawsuit against Ripple Labs, the creators of the XRP cryptocurrency. The uncertainty around what’s coming makes me nervous.
I am not an anarchist. I don’t mind regulation. Like most people in the crypto community, I just want clarity, fairness, and common sense. Given the track records of Yellen, Congress, and especially Ginsler, I don’t have much confidence that is what we’ll get.
An Ounce of Prevention
Before investing in anything, here are a few rules to remember.
First, recognize that is a risky game to begin with. Before you invest in anything, ask yourself, am I okay if this goes to zero? With each Altcoin, the chance of going to zero varies. I think Bitcoin has been around long enough that the chance of it going to zero is virtually nil. But even with Bitcoin I ask myself that before I buy. If the answer is no, that means I’m investing more than I can afford to lose. Either spend less or move on to something else.
Second, you can protect yourself by taking profit, meaning when you have a chance to sell at a decent profit, take it. Between September 2020 and April 2021, I was able to let my Altcoins double in value, then sell half. That way I recovered my investment, and whatever I could gain after that was gravy. That is pretty easy in a bull market. But in a bear market, you may need to think in terms of 10, 20, or 30% profit.
Third, use stop-losses. If you don’t know what that means, it means you need to educate yourself before you even think about investing.
Fourth, NEVER INVEST MORE THAN YOU CAN AFFORD TO LOSE.
Fifth, don’t put all your eggs in one basket. Professionals tell you to diversify your portfolio, and that goes for crypto, too. Putting all your money into one or two Altcoins is like putting it all into lottery tickets.
Help! My Crypto Is Down!
Even if you take those steps, at some point your crypto will go down in value. You have three choices:
- Sell at a loss.
- Hold until the market goes up again.
- Trade for a better crypto.
Let’s talk about each of them.
Sell at a Loss
Sometimes that is your best option. For Bitcoin, I think holding is usually the right move, unless you need to pay some bills (not financial advice). But with Altcoins, you need to be ready to sell. I learned the hard way “hodling” is for Bitcoin, not Altcoins (with maybe a few exceptions). From now on, I’m taking profits when I can. And if that Altcoin turns out to be a Sh*tcoin, go ahead and take the loss.
It was no fun selling my UST at a 20% loss, but it was absolutely the right move, especially considering it’s trading at less than a dime now. I would gladly have sold my LUNA at any price, but now it’s totally worthless.
Professional investors have this already built into their strategy. When they take a chance on a risky investment, they put in a stop-loss. That means you can set it up where if the price drops, say, 20%, it will sell automatically. That will keep you from getting wrecked.
Selling at a loss is no fun, but sometimes it is better to cut your losses than stay in a sinking ship.
Hold until the Market Goes up Again
There are nearly 20,000 Altcoins listed on coinmarketcap.com. Many if not most will not survive the bear market. The few that do, however, will gain more than BTC, simply because they are smaller and have more room to grow. Knowing that makes people sometimes hang on to losing Altcoins longer than they should. Myself included.
I am holding (or “hodling”) my Bitcoin no matter what happens. Except if the price goes above 100K, I might sell a small percentage, because you always need cash. I believe Bitcoin has the fundamentals to survive the bear market and take off again in the next bull market. That is also true of a few Altcoins. There are a few I’m holding on to, even though my investments currently are in the red. If I need the cash, I might sell to pay bills and wait to re-invest when I’m better situated financially. This bear market is likely to last for a while, so if it’s a good project, you will get another chance.
It’s okay to sell your Altcoins, whether to take profit or cut your losses. But if your research tells you the project is solid and a good long-term investment, it’s okay to hold too.
Trade for a Better Crypto (or Other Investment)
Everything in the crypto market went south between May and July of last year. It caught me by surprise. According to the four-year cycle, we should have still been in a bull market. I had small investments in probably twenty different Altcoins. Bitcoin dipped hard in May because of FUD from Elon Musk, and my Altcoins dipped shortly after. I was looking at selling everything at a loss.
With most of them, instead of selling I traded them for Bitcoin. All those investments had lost value relative to the dollar. But Bitcoin rose and fell in tandem with them, so their value relative to Bitcoin was still roughly the same. It didn’t feel like a loss because of that, and because when Bitcoin pumped again, I recovered those losses. Well, I would have if I had sold. More on that in another post.
That looks like the situation we’re in now as well. There is always some risk. But in a bear market, I’ll take my chances with Bitcoin over any Altcoin. It has been around for thirteen years, longer than any other crypto. It has seen multiple bull markets, bear markets, and black swan events, and it is still here. Even when it dumps, it dumps less than Altcoins. It is the most secure network anyone has ever built. No one who has ever bought and held for at least four years has lost money. How many investments can say that? In fact, I am almost to the point where I’ll take my chances with Bitcoin over any other investment period.
So if your Altcoins have lost their shine, I always think trading for Bitcoin is a good move (Again, not financial advice).
Moving from Risk-on to Risk-off
Also in a bear market, you need to be more conservative with your investments in general. Professional traders and investors use the terms risk-on and risk-off. Risk-on refers to assets that are new, speculative, and could bring either great gains or big losses. In other words, risky. Risk-off refers to assets that have been time-tested, are less volatile, and likely to bring smaller gains but also smaller losses if the market goes down. Ask your financial advisor what that means in practical terms.
In a bull market, you can make great profits with risk-on investments. But in a bear market, the professionals will move their money out of risk-on investments and into either risk-off or cash. More traditional investors are selling their Bitcoin than they have in recent months, because they consider it a risk-on investment. Personally, I would call BTC a risk-off investment (for reasons stated above), but I’m not a professional. Talk to a financial advisor about it first and do your own research.
But traditional investors moving away from BTC is another indication we have entered a bear market, so you may want to consider stocking up on more traditional investments for now. We are likely in for a rough few months. Crypto Jebb saw a bear flag formation on the charts that could mean BTC is going down to $20,000. You don’t have to know what that means.
Just know that it’s possible. In the past, BTC has dropped as much as 85% from previous highs during bear markets. We saw a high of $69,000 November. A drop of 85% would take it to $10,350. All of that to say even though the price has stabilized for now, we may not have seen the bottom yet. Add to that the challenges of inflation, the supply chain issues, whales possibly manipulating the markets, the war in Ukraine, regulatory uncertainty, and a natural bear market on top of that means, well, I don’t know what it means, but it won’t be good most likely. If nothing else, I think we can still count on another bull market after the next BTC halving, which is estimated to take place in May, 2024.
But just as bull markets present opportunities that don’t exist in bear markets, bear markets present opportunities that don’t exist in bull markets.
The Silver Lining
The silver lining of any bear market is that if you can identify good long-term investments, now is a time to buy the dip. Back in October and the beginning of November, people were saying, “I wish Bitcoin would dip, so I could buy some.” What do you think this is? Bitcoin is settled at about $30,000 for now. That is over 50% off from the previous high of $69,000. If that’s not a dip, what is? But remember, only buy if you are not going to need the money any time soon. It could be a while before the bull market returns.
But what if it goes down further?
Buy it again. (Not financial advice). As Warren Buffett says, “Be fearful when others are greedy. Be greedy when others are fearful.” In other words, sell when most people are buying. Buy when most people are selling. Of course, that only applies to long-term investments. If you think BTC is a good long-term investment, now is a great time to accumulate.
My preferred strategy for buying is dollar cost averaging (DCA). This is like if your employer offers a 401K. The best way to invest is to have it deducted from your paycheck automatically. That way, you don’t miss it. DCA works the same way. You set up with an exchange to buy automatically on a regular schedule. Some weeks it is lower, some weeks it is higher, but on average I am getting a good price.
I started with $10/week of Bitcoin. Even on a tight budget, you can probably work that out. I don’t know your situation, but there is probably something you can sacrifice to get started purchasing something for your future. Coinbase and Gemini are two exchanges that let you set up recurring buys (same as DCA). Their transaction fees are pretty high, though.
There is a service called Deltabadger that will allow you to avoid most transaction fees on your DCA. You can go on their website to see which exchanges you can work with. I use Coinbase Pro, but there are several others. If you sign up with this link, you will save 10% off your first purchase. And you don’t have to pay at all until you buy $1200 worth.
Sign up for Delta Badger here.
If you want a more detailed account of what happened with LUNA and UST, you can watch this.
Thanks for reading. I hope this was helpful. How are you feeling right now? Are you hodling or selling? Which projects do you think will survive the bear market? Which ones won’t? Let me know what you think in the comments.
Bitcoin Update: What Happened to the Four-Year Cycle?
I wrote a post about Bitcoin a few months back. It was intended to be a primer for those who want to understand it better. If you are new to Bitcoin (BTC), you might want to read it to understand some of the terms I’ll be using here. While I talked about some of my strategies for investing, it was not intended as financial advice. And here I am again making the same disclaimer. I am not a financial adviser. This article is for information and entertainment purposes only. There is inherent risk in all investing, so do your own research.
Back in July, I believed Bitcoin could either drop below $20K or go to six figures by the end of November. Neither scenario played out. While it did reach new all-time highs in November, it then fell about 30% and is now moving sideways between $40-50K. That’s not bad in the grand scheme of things, and I still believe the long-term future for Bitcoin is very bright. But it’s a far cry from breaking $100K, as most of the experts I listened to believed it would do by the end of the year. Their belief, and hence mine, was based on what is called the Four-Year Cycle. I explained that in my previous Bitcoin article.
The Four-Year Cycle should have given us a bull market that should have ended sometime between September and November. Then there would have been a crash, and a long bear market would have followed, though the price would recover to some degree before the next Four-Year Cycle. If the all-time high of $68K we saw in November really was the end of the bull market, the price should have crashed down to about $10K. We have not seen the kind of price run-up or crash we should have according to the Four-Year Cycle, and I think I know why.
Whale Manipulation
On August 20, 2020, Microstrategy became the first listed company to buy Bitcoin. Since then, the company’s CEO Michael Saylor has become one of the most outspoken advocates for Bitcoin, singing its praises as a prime store of value, a hedge against inflation, and key to the company’s long-term financial strategy. Since then, many other corporations and institutional investors have jumped in, notably Paypal, Tesla, Square, ARK Invest, and Pantera Capital, just to name a few. The big money they brought to the market helped propel the price of Bitcoin from $29K on January 1 to a then all-time high (ATH) of $64K on April 14.
While it was exciting to see the price climb and Elon Musk tweet that Tesla added $1.5 billion of Bitcoin to its balance sheet and would accept it as payment, in the back of my mind there was this nagging thought. If anything could change the Four-Year Cycle, this would be it. If whales—big money investors—have the power to move the price up, they also have the power to move the price down.
After April 14, the price dropped some, settling into the $50,000’s, but no one who knew about the Four-Year Cycle was freaking out. It looked like a normal price correction, but according to the Four-Year Cycle, we were still in a bull market. Then in May, a flurry of negative press came out, including Elon Musk reversing his position and saying Tesla would no longer take Bitcoin as payment, citing concerns over its carbon footprint. After that, the price did not just drop. It plummeted as low as $29K before the end of the month, more than 50% off its recent ATH. That is not normal in a bull market. I don’t think it’s normal in any market. One billionaire tweets an endorsement, and the price immediately pumps. A couple months later, same billionaire tweets something negative, and the price immediately dumps. And how many people do you think were really interested in buying a Tesla specifically with Bitcoin? How many people really said, “What? I can’t buy a Tesla with Bitcoin? That’s the only reason I bought it in the first place. I’m selling!” This reeks of manipulation.
What Does Market Manipulation Look Like?
Sometimes markets move. Sometimes markets are moved. Whales are people or entities that have enough money to manipulate the market. They want to buy low and sell high, but they don’t always wait for the price to go up or down. Through strategic buying and selling, they can make the price go up and down.
In the 1930’s, a man named Richard Wyckoff found that market manipulation follows consistent patterns. The big investors who manipulate the markets all act the same way, so he referred to them collectively as “the Composite Man.” When you see signs of manipulation, ask yourself, “What does the Composite Man want, short-term and long-term?” Long term, it’s pretty simple. If it’s an asset they want and believe will go up a lot in value over time, they want to acquire as much of it as possible at the lowest price possible. Short-term, they either want to drive the price down, so they can buy at a discount, or drive the price up to take profit. This goes in cycles. Wyckoff created very detailed charts that show how to recognize what the Composite Man is doing, and the price action of Bitcoin this year has followed those patterns.
Without getting too technical, a Wyckoff pattern occurs in two stages called Accumulation and Distribution. During the Accumulation stage, the Composite Man is buying but careful not to buy too much too quickly. This is when he wants to keep the price low, so he can accumulate a sizable chunk of the asset. When the Composite Man (I’ll call him “the Man”) is ready, he buys more aggressively to drive the price up. The Man wants to tie this to some story or series of stories in the media, so when smaller investors see the price go up, FOMO (Fear of Missing Out) will kick in, and they will rush to buy, driving the price up even further. It works even better if the Man has access to those media channels (or 55 million followers on Twitter) and can push positive stories at the right time.
When the price is as high as the Man thinks he can make it go, he switches to the Distribution stage. This is when he sells off, not all of it, but enough to make the price dip 10, 20, maybe 30% very quickly. Again, they like to time it with some negative story (or stories) in the news. Retail investors who FOMO’ed in now experience FUD (Fear, Uncertainty, and Doubt) and sell to cut their losses, driving the price even lower. When they sell, who buys? That’s right. The Man, the people who created the FUD in the first place. Now the Man is back to Accumulation, and the whole cycle repeats. If you want more detail, here is a video that explains it well.
The End of the Four-Year Cycle?
I’m not saying Elon alone is responsible for this. Remember, the Man here is not one individual but a composite of big money investors. I think the Man had this planned all along, and Elon (wittingly or unwittingly) gave them cover first for Accumulation, then for Distribution. After revisiting its annual low of $29K on July 19, it appeared the Man had accumulated what he wanted, because Bitcoin started going up again. It reached another all-time high of $68K on November 10 before going down again. For the past two weeks, the price has been fluctuating between $42-49K.
The Four-Year Cycle has pretty well-established patterns of bull and bear markets. This kind of movement looks like neither. If $68K in November was the top of this bull market (which is when it should have ended), the price should have dropped about 85%, which would put it around $10K. We would know then the switch from bull to bear market has happened. Why isn’t Bitcoin behaving like it has in the past? I think it’s because this is the first Four-Year Cycle we have seen where “the Composite Man” is going after Bitcoin. Even experts who have followed Bitcoin for five years or more are at a loss to say whether it’s time to take some profit in anticipation of the bear market, or whether the Man will drive the price up one more time.
I’m beginning to think we need to stop thinking in terms of the four-year cycle and start thinking in terms of Wyckoff’s Accumulation and Distribution.
There is one more thing you need to know about the Man. They have a hierarchy of investment priorities for different levels based on risks.
- Traditional markets (stocks and commodities)
- Bitcoin
- Altcoins (any cryptocurrency other than Bitcoin)
1 is less risky than 2, which is less risky than 3. When the traditional markets are down, they tend to move money out of riskier investments. That means when the traditional markets drop, Bitcoin drops. When Bitcoin drops, altcoins drop. It works the same in reverse. When the traditional markets are up, Bitcoin is up. When Bitcoin is up, altcoins are up. I saw this happen in May. When Bitcoin dumped, my altcoins followed. I traded most of them for Bitcoin and Ethereum (ETH) to wait for the next upturn.
Earlier this month, the traditional markets dropped, so the latest drop in Bitcoin and altcoins can be somewhat attributed to that. But considering that a normal cycle would have had the price down to $10K, a price hovering in the 40’s isn’t so bad. Furthermore, there are indications that a new bottom might be in.
Retail Investors Wising Up
Data shows that the amount of Bitcoin on exchanges is the lowest it has been in a long time. What does that mean? People buy, sell, and trade cryptocurrencies on exchanges like Coinbase, Binance, and Crypto.com. However, most people don’t keep them there. They will keep most of their crypto on a digital wallet because it is more secure. Some popular wallets include Exodus, Coinbase Wallet, and Trust Wallet. These are sites on a blockchain network where you can deposit BTC and other crypto, and you are given encrypted keys to access it when you want.
While there are many factors to consider when trying to determine where the price is going to go, one factor is the amount of BTC on exchanges. When there is a lot of BTC moving from wallets to exchanges, that means people are looking to sell. But when a lot of BTC is moving off exchanges to wallets, that means people are planning to hold for a while. With BTC on exchanges at such a low level as it is now (at the time of writing), the chances of a huge sell-off driving the price down much further are very low.
Furthermore, two of my favorite crypto analysts (Crypto Jebb and Satoshi Stacker on YouTube) showed data that says of the BTC that moved onto exchanges recently, around 5% came from wallets holding less than one BTC. That means despite the recent drop of 25-30% in just the last few weeks, retail (or small) investors are not selling. That also proves while the Man has great power to manipulate the market, that power is limited. If they are trying to scare small (and probably inexperienced) investors into selling at a discount, it is not working. When retail investors see through the FUD and Hodl (not a typo), the game of shaking BTC out of weak hands becomes pointless. I hate that this is part of the game, but if you want to invest in BTC, you have to be wise to the Man’s manipulations. But I am encouraged that other retail investors like me are catching on.
Again, this is not financial advice, but this is why I’m not selling yet. There probably will be a bear market at some time in the future, but this looks more like Wyckoff Distribution at the moment. While I don’t know when or even if it will happen, I think the price has to go up again before another bear market. If it does, that will confirm to me that the Four-Year Cycle is dead, and anyone investing in BTC will need to study Wyckoff in more depth.
I can’t help but think that once the Man sees he has gotten the price as low as he can, he will send the price up again for another round of profit taking. He might spend a few more weeks keeping the price below $50K so he can accumulate more. But his M.O is to drive the price down to accumulate, then drive the price up to take profits, and repeat. I look at the fundamentals of Bitcoin, and they are still strong no matter what the Man says. No one has ever lost money holding BTC for at least four years. Therefore, the only time to sell for me is just before a bear market. That way, when the price drops, I can buy back at a discount, just like the Man. But until then, I intend to keep calm and HODL on.
How to Survive a Bitcoin Bear Market
Confession time: While we were in quarantine, a lot of people picked up new hobbies. My new hobby is Bitcoin and cryptocurrency. I was a skeptic for a long time, but now I’m a believer. The problem is I spent so much time learning and planning trades it consumed my writing time. I’m going to have to learn balance. But the best way I can justify that time I spent is to write about it.
A quick disclaimer: I am not a financial advisor. Anything I say is for educational and/or entertainment purposes only. Any financial product or service, including particular crypto currencies, exchanges, stocks, experts, or whatever I use as examples do not constitute an endorsement. Always do your own research.
I have owned some Bitcoin for only a little more than a year, so I can’t say if we are in a bear market now. But the fact that we are having that debate at this time took me by surprise. If you don’t know, Bitcoin is a cryptocurrency, meaning it is “a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.” So it is an asset that exists completely on a vast computer network. Bitcoin was the first and is by far the biggest cryptocurrency in terms of market capitalization. Coinmarketcap.com lists over 10,800 crypto currencies that can be bought, sold, and traded on exchanges, similar to stocks and commodities. Some of the more popular exchanges are Coinbase, Binance, Kucoin, Gemini, and Kraken.
Also like stocks and commodities, the value can go up or down depending on supply and demand. If more is being bought than sold, the value goes up, and vice-versa. While Bitcoin is the focus of this article, I may refer to other cryptocurrencies (a.k.a., cryptos) for comparison.
If you have heard anything about Bitcoin, it’s probably that the price is very volatile. It can go up very quickly and back down just as quickly. I already knew that, but I thought I had the market figured out. The Bitcoin (BTC) price normally moves on a four-year cycle because of an event called the halving. At set intervals, the amount of Bitcoin that can be mined (the term for creating new Bitcoin) drops in half. This diminishing supply coupled with greater demand makes the price go up for about 16 to 18 months before there is a bear market. The most recent halving was in May, 2020. Based on that, we should have had a bull market until at least mid-September, maybe even into October or November. Until May 12, it was playing out that way. Then Elon tweeted, and the price crashed.
We are now 50% down from an all-time high in April. This was supposed to be a bull market. How could one tweet break the cycle? Or maybe the cycle is not over, and this was just a much needed correction. But a 50% correction in a bull market? And we haven’t recovered yet? Should I hold on and hope the price goes up, or get out now to cut my losses?
Many who bought in March or April are asking the same thing. Again, I’m no expert, but I’ll tell you how and why I got in, and what I have learned in this crash.
How I Got Started with Bitcoin
When I first heard about Bitcoin in 2013, and it sounded like a pipe dream. I didn’t see how a currency, asset, or whatever you call it, could exist only on computers and have real value. Last year, I saw a presentation that explained what currency is and how it works. We are used to currencies having a physical form, for example, gold, bills, coins, etc. However, that is not really necessary. Anything people accept as a medium of exchange can be a currency, even if it is entirely digital. So yes, Bitcoin can be real money. El Salvador has even made it legal tender for the whole nation.
I also learned about the blockchain technology behind it. A blockchain network is the most secure network ever created. The first Bitcoin was mined, or created, on January 3, 2009. Since then, the Bitcoin network has never been hacked, because the blockchain it uses is so secure. Forget about cryptocurrency for a minute. Just think about an Internet that is virtually unhackable. Do you think there could be some other applications for that? Bitcoin and the whole crypto market is not even the tip of the iceberg of blockchain’s potential. That more than anything convinced me Bitcoin and cryptocurrency are here to stay.
My First Bitcoin
I bought my first Bitcoin in June last year, shortly after the halving. The price went up, slowly at first. Then on October 21, 2020, Paypal announced users could buy, sell, and spend Bitcoin and other cryptocurrencies directly from their accounts. The price went up pretty steadily from then on. There were a few dips, but they were not deep, and they did not last long.
By the time Coinbase, one of the biggest cryptocurrency exchanges, IPO’d on April 14, the price was up to an all-time high of about $63–65K (prices vary some between exchanges). In the next few days, there was a pull back, and the price hovered in the 50’s for a few weeks. That wasn’t so bad. Even a bull market will have corrections like that.
Then on May 12, Elon Musk tweeted concerns over its energy use and climate change. I care about climate change, but in this case I think the concern is overblown. I plan to write another article to explain that, but this chart will give you an idea.
As you can see, the latter two use more than twice as much energy. Furthermore, the energy Bitcoin uses is more likely to come from clean, renewable sources. I wonder what would have happened to the banks if Elon had raised concerns about their carbon footprint. If people knew about how damaging gold mining is to the environment, would they stop buying it?
But Elon’s 56 million Twitter followers got the message. The price dropped about 15% in just one day and kept falling. At the bottom, it reached lows of about $29K, a more than 50% drop from its recent all-time high. Most experienced crypto investors know this kind of volatility is normal. But even many of them were surprised that such a drop happened when we are supposed to be in a bull market. Experiences like that create FOMO (Fear Of Missing Out) and FUD (Fear, Uncertainty, and Doubt). You could also think of them as fear and greed, and they tend to move the markets more than one mercurial billionaire.
FOMO and FUD: How You Can Be Your Own Worst Enemy
What is the mantra of professional investors? Buy low, sell high. FOMO and FUD will make you do the opposite. Here’s how they work together.
You heard about Bitcoin a few years ago, and you thought it was silly. You haven’t thought about it in years. Then you hear it broke its previous all time high of $20K, and it’s going up, up, up. $30K, $40K, $50K, $60K. You don’t understand how it works, even at a “Bitcoin for Dummies” level. You don’t know any market fundamentals. You don’t know what makes the price go up or down. But you are afraid of missing out, so you rush to buy before it’s too late (FOMO). Then the price falls: down, down, down. Just when you think it can’t go lower, it does. You are afraid of losing everything you put in, sell at a loss, and promise never to do that again (FUD).
Experienced investors use this FOMO and FUD to enrich themselves. When everyone FOMO’s in, they sell. When everyone FUD’s out, they buy. The best protection against FOMO and FUD is to educate yourself. Learn the history of why Bitcoin was created. It’s a fascinating story. Learn how cryptocurrency compares with fiat currency (dollars, euros, etc.). Learn what blockchain is and how it works. You don’t have to get too technical, just enough to where it makes sense. Learn about the halving and the four year cycle. And most of all, listen to people who have held Bitcoin for four years or more. They have seen markets go way up, way down, and everywhere in between, and they are still in the game. That will give you the perspective you need.
I guess what I’m trying to say is don’t invest in something just because the price is going up or some celebrity tweeted about it. Get at least a basic understanding of what it is, what value it brings to the market, why the world needs it, whether the business model is sound, how much investment it is attracting and from whom, and risks versus potential reward.
With Bitcoin, the four-year cycle has meant it reaches an all-time high about 16-18 months after the halving. Despite this downturn, there is still time for that to happen. Then it drops 85% before beginning to recover. If that happens again, will you beat yourself up or see it as a buying opportunity?
It Is Not a Get Rich Quick Scheme
Of course, I knew that before I got started. But it is easy to forget when you see the price go parabolic. When the price skyrocketed to an all-time high of about $65,000, I started having visions of all the remodeling my wife and I want to do and retirement by the end of the summer. Then the price went into free fall, like Tom Cruise in Mission Impossible, when his assistants stopped him just before he hit the floor, but he’s just hanging there with his arms and legs up to keep from setting off the alarm.
At first, I was scared. But as the price has settled in the 30,000’s, I realized this crash was the reality check I needed. There are some newer cryptocurrencies that saw over 1000% gains this year alone. Bitcoin is not that kind of investment. It is so big now, it takes much more to move the price up than for something like Polygon (MATIC), which currently sells at about $1.05.
Of course, with greater rewards come greater risks. Many of those with 1000% gains dropped back to pre-bull levels in the crash. Even though they’re not connected, most cryptocurrencies follow Bitcoin in the market. If Bitcoin pumps, they will pump more. If Bitcoin dumps, they will dump more, so the losses can be much greater as well. Some even went down to zero, so make sure you do your research before jumping in. Bitcoin has been around long enough that it’s highly unlikely that it will go to zero now. But if you expect to get rich with it, you have to think in terms of years, not weeks.
So what do you do when the price drops?
Buy the Dip
If you don’t believe in it as a long-term investment, the emotional roller coaster will drive you nuts. If you do believe in it as a long-term investment, you won’t get caught up in the hype when it goes up, and a price dip is a buying opportunity. Large investors have been buying even during this crash, which is the one reason I don’t believe this bull market is over. Who knows how long this opportunity will last?
How should you buy? You could try to time the market. When I think about how I bought at $9.7K, it’s tempting to think I could have sold at $63K. That would have been over a 600% gain. And then I could have bought back in at $29K to prepare for the next bull run. But I had no way of knowing where the top or the bottom was. Professional traders have very sophisticated market analysis tools, and even they get it wrong sometimes. That is why I believe the best strategy for buying is dollar cost averaging.
Dollar Cost Averaging
This is a way you can take advantage of an extended price dip without having to guess which way the market will go. On most exchanges, you can set up a recurring purchase, where you buy a set amount every day, week, or month. That is called dollar cost averaging. It’s a way to minimize your risk, because you’re not putting all your money in at once.
When I started out, I set up to buy $10 of Bitcoin per week on Coinbase. The price went up slowly from June to October, and I kept buying. When the price went up much more noticeably, I stopped my weekly buy and made bigger, less frequent purchases. But even when the price is going up, dollar cost averaging is not a bad strategy, because the price will come down at some point. On average, it still works out in the long run. The following chart shows what dollar cost averaging with $10/wk would have yielded today.
$10/wk for four years equals $2090 invested. For July, 2021, that results in a value of $9448. That is a gain of about 352%.
But no matter how I buy, I do not put in more than I can afford. I have heard of people losing their homes because they bought too much and at the wrong time. This market is much too volatile for you to spend the money for your rent, mortgage, groceries, water, electricity, children’s education, or any other essentials. I approach this like a retirement account. I do not put in money I need for daily or monthly expenses. I do not put in money I am likely to need in the next few years. I put in a little at a time, because I expect it to appreciate in the long run. If you are comfortable with that approach, the next strategy is for you.
Bonus Tip: Prices tend to be lowest on Friday mornings, so that is when I like to set weekly buys.
Hodl
That is not a typo. Thanks autocorrect for making me retype it. On December 18, 2013, someone with the username GameKyuubi posted on the Bitcoin Forum with the title “I AM HODLING.” Why? Because in his own words, “I’m a bad trader and I KNOW I’M A BAD TRADER.” The gist of it is good traders know when to buy and sell, but he doesn’t. Trying to time the market is a trap for most traders. You end up buying high and selling low, the opposite of a good trading strategy. But he has figured out that the overall trend is up. What do you do with an asset that is volatile but goes up in value over time? You buy and hold (or hodl). The crypto community still likes to use that term today.
One obvious advantage is you never say, “I should have sold or traded then.” Whenever you have that thought, you just remind yourself, “No, I am hodling.” I want to be clear, though, this not a good strategy for every cryptocurrency. I used to think I had to hodl at least some of everything. Now, I hodl Bitcoin (BTC) and Ethereum (ETH). There are a few others that I don’t exactly hodl but am reluctant to sell. Any others I have no problem selling if the price goes up, or if it is time to cut my losses. There is no way I can keep up with every crypto that is supposed to be “the next Bitcoin,” so I am very selective about it.
Another advantage is holding onto any asset, including crypto, for at least a year will reduce your tax liability. So next I want to talk about taxable events for crypto currency.
Be Aware of Taxable Events
I am not an expert, so check with your accountant or tax advisor on this. If you don’t have one, you will probably need one once you get into crypto. I learned that buying crypto is not a taxable event. If all you do is buy and hold, you won’t have to worry about taxes on Bitcoin or other crypto. Good for you, hodlers. Selling or trading one crypto for another is taxable. For example, if you want to sell some of your Bitcoin to take profit, or exchange some of it for Ethereum (ETH), those are considered taxable events.
As I understand it, if you trade one asset for another, any profit on that trade becomes taxable. That might mean if you buy that Tesla with Bitcoin (assuming they bring that option back), you might have to pay extra taxes, because you swapped one asset for another. Unlike El Salvador, Bitcoin is not considered currency in the US, so using it to buy something could make you liable for capital gains or other taxes. Again, I am no expert, so don’t take my word for it. That’s just what I have heard.
But unless you are 100% hodling, you will likely have to pay taxes. There is some software available to help you navigate that, so I’ll tell you what that is like.
Daily Interest Payments on Crypto Might Not Be a Good Thing
There are many good opportunities to earn interest on crypto, and I encourage you to investigate them and find one or more that works for you. However, with what I know now about crypto tax software, I would avoid offers of daily interest payments on any cryptos for now. Let me explain. The programs I’ve seen are free up to a certain number of transactions. Once you cross that threshold, you will have to pay. How much depends on how many transactions you’ve made. That includes all transactions — buy, sell, swap, move, or gifts. Any transaction whatsoever.
When I joined Coinbase, I took advantage of their Earn program. They offer the chance to earn free crypto by learning about it. That was a good thing. I got between $3-$6 in several free cryptos just for learning, which I was happy to do. A few of them offered 4–6% APY in interest, which was much better than the 0.1% I was getting from my bank. I was like, Great. Not only do I get free crypto, I get interest on it. And on Coinbase it’s compounded daily, so it will gain faster. And if the crypto takes off, I will have just a little more boost to it. Each of those daily interest payments was another transaction. Do you see where this is going?
I had a couple hundred or so transactions that amounted to nothing but counted toward my transaction limit on the tax software. I know my dollar cost averaging creates more transactions, and I’m okay with that. I didn’t know each and every one of those miniscule interest payments would count towards the number of my transactions.
I had to shop around, and the cheapest software I found was koinly.io. Even with that, I was going to have to pay $99. Fortunately, I was able to get a summary report for free. This year, I probably will have to pay for a full report. But I will try to do it without all those negligible interest payments, maybe putting all of it into one total transaction if possible. The only way I would take daily interest payments now is if I had a large enough balance to where the payments actually amount to something. I mean, if you’re getting 6% interest on one million dollars, that would give you daily payments of $164.38. I could live decently on that. Otherwise, to save on your tax software, you might want to look for weekly or monthly payments.
Despite tax liabilities, you might want to take some profit if the market goes up again. I’ll talk about that next.
Taking Profits
You could adopt a “modified hodl” strategy, where you take profit when the price is going up. My ideal strategy is when the price doubles, sell half. Then you will make back your investment, and you can hodl the rest. I was fortunate to be able to do that not only with Bitcoin but some of the other cryptos I had invested in last year. Of course, that only works if you buy at a time when the price can still double or more. That is why you want to buy the dip. Whether it’s a temporary correction or a bear market, buying when the price is down sets you up to take profit during a bull market.
What should you do after selling? Paying off some high interest debt is always a good thing. If you have that taken care of, experienced investors set aside part or all of their profits and wait to buy the next dip. Then when the price goes up again, they take some profit so they can buy the next dip. Rinse and repeat. That is how crypto fortunes are made.
“Corrections”
When I bought my first Bitcoin, the price was about $9700. As I write this, the price is now just under $35K. That’s a gain of over 200%, even with the recent crash. I understand, though, if you bought in at 40K, 50K, or 60K, you’re not feeling great about your decision now.
Though I don’t have any gift of prophecy or crystal ball, I feel confident in saying the bull market will return. The question is when and for how long. Will we have to wait four years to see any gains, or will the market come back in the next few weeks? Again, history says a bear market will come, if it’s not here already. I just don’t believe this is it.
But one more thing that surprised me. One of the reasons cryptocurrency was created was to eliminate the need for a “middle man” in financial transactions. Third parties like banks, credit cards, Western Union, and Paypal take fees for facilitating transactions. Cryptocurrency, theoretically, should reduce those fees significantly, but in practice that is not always the case. Ethereum’s ERC-20 network especially has seen fees go up a lot in the last several months. Bitcoin (BTC) has nothing to do with ERC-20, but sometimes its fees are too high as well. One thing you can do is convert BTC to Litecoin (LTC), which has much lower fees, and then trade, sell, or withdraw it.
What Comes Down Must Go Up?
For now, I want to leave you with this. If you bought for the first time at the top of this market, that doesn’t mean you made a bad decision. There is a saying in the Bitcoin community: “When in doubt, zoom out.” That means when the chart looks bad for a month or two, look back a year or two, or even going back from the beginning to now.
You might be wondering if it’s too late to get in. If you believe in Bitcoin long-term, then this price dip is a great time to buy. If you don’t believe in it long-term, then it is probably not for you.
Past performance is no guarantee of future performance. It is an extremely volatile asset. Parabolic gains and crashes come with the territory. But there is enough history to be optimistic in the long run. It’s hard to see this on the chart, but in 2013, the price dropped 80%, then rose 2300%. Will we see a similar bounce in the coming weeks? I don’t know, but anyone who has bought and held for at least four years has come out ahead. In July, 2017, the price averaged around $2600. If you bought four years ago and held, while people are complaining about a price hovering between $33–37K, you would be up over 1200%. Where do you want to be four years from now?
Just understand there is still some risk to it. I think in the next two or three months, the price could go to six figures. But if this really is the end of the latest bull market, the price could drop to $20K or even lower, and we will either have to hodl or wait for the next bull market to take profits.
Conclusion
So if you are just getting started, or considering getting started, here are the important lessons I’ve learned in my first year:
- “When in doubt, zoom out.”
- Dollar cost averaging is the easiest, lowest risk, and most stress-free way to get into this (or any) market.
- Consider hodling or modified hodling.
- It’s okay to take profit in a bull market. Have a strategy for when and how to do that.
- If you are looking to get rich quick, look elsewhere.
- For tax calculations, daily interest payments might not be worth it. Weekly or monthly payments might work better for you, depending on how many transactions you want to do.
- Watch out for high transaction fees. Converting BTC to LTC can help with that on some exchanges.
- You don’t need expensive programs to learn how to do this. There is plenty of good information available for free.
- Seek advice from people who have been in for at least four years. That way, they have seen at least one complete bull and bear market.
- Don’t rely on one source to tell you what to do. You should have three or more different sources. Look for people who have a lot of experience and a track record of putting out good information.
- Certainly do not listen to people who are either always positive or always negative. The always negative ones are just pushing FUD, maybe even hoping to convince you to sell to them at a discount. The always positive ones will miss the signs that a bear market is beginning.
- Look for experts who are positive long term but aren’t afraid to tell you when we are headed for a downturn.
- FOMO + FUD = consistent losing.
For more information on what Bitcoin is, how it works, and how to get started, I can recommend a site and YouTube channel called 99bitcoins. Have you had any experience with Bitcoin? What do you think of it? What hobbies did you pick up while quarantining? Let me know in the comments.
David Anderson 