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 am almost completely convinced the Four-Year Cycle for Bitcoin is dead. As more big money investors have jumped into the market, its price has become tied to their patterns of investing. I don’t claim to be an expert, but here is one thing I know. They have a hierarchy of investments.
- Traditional markets
This means when traditional markets pump, Bitcoin will pump. When Bitcoin pumps, Altcoins will pump. It works the other way too. When traditional markets dump, Bitcoin will dump. When Bitcoin dumps, altcoins will dump.
We saw this on Friday, January 21. With professional investors expecting the Federal Reserve to raise interest rates, they sold off a lot of stocks and similar investments. That meant selling pressure on Bitcoin and Altcoins. If you looked at the charts that day, you could see all of them dropping together.
The Fed had not yet raised interest rates, but just the announcement that they might was enough to send the markets crashing. As it turns out, they announced on January 26 that they were not raising interest rates yet, but they plan to do so in March. The markets recovered somewhat, but it has been a rough month all around. Bitcoin dropped to nearly $30,000 in the latest dip. It has recovered to almost $38,000 at the time of writing. Altcoins experienced a similar sharp dip with a partial recovery.
What Happened to 100K?
Many experts expected Bitcoin to reach a price of $100,000 by the end of 2021. Plan B famously made (or retweeted) predictions for Bitcoin’s price at the close of each month from August to December. And for a while, it looked downright prophetic.
|Month (2021)||Plan B Prediction||BTC Price at Month Close|
If you needed a reminder that no one knows what is going to happen with Bitcoin in the future, look at the first three months, then the last two. August through October, he nailed it. At the beginning of November, the price kept going up, reaching a new all-time high of $69K. “98K this month! We break 100 in December!”
I almost tried a leverage trade in November. Good thing I didn’t. But I’ve learned an important lesson. When you think you know how high and how fast Bitcoin is going up, you really don’t. I’ll admit it was disappointing not to see those highs that looked like a sure thing back in early November. However, I still believe the fundamentals of Bitcoin are still strong. Price doesn’t always reflect fundamentals. Just because the price is volatile doesn’t mean the fundamentals have changed. When there is growing demand and limited supply, it has to go up sometime.
One move I made that did not work out was to put a little into some altcoins, expecting them to pump when Bitcoin pumped. Bitcoin did not pump like I expected, and neither did my altcoins. I was going to sell them for a profit. As it worked out, selling meant taking a loss. In that situation, I like to trade those losing alts for Bitcoin (or Ethereum). Bitcoin will come up in value again, so I have a chance to recoup my losses.
Assets that are considered “high risk” (mainly tech stocks, Bitcoin, and Altcoins) have done will in the last couple of years. That was in an environment of extremely low interest rates and quantitative easement (when the Fed sharply increases money supply). Those conditions might be good for investing, but they lead inevitably to inflation. The Fed will have to put a stop to this, so we could see that coming to an end in March. Between January 21-26, traditional markets, Bitcoin, and Altcoins all dropped together. I think this was a preview of what will happen when the Fed starts taking action to curb inflation.
The Fed has indicated they will take the actions they did not take last week—raising interest rates, reducing quantitative easement—in March. Instead of a market recovery, this feels more like delaying the inevitable. The market recovery we’re seeing now seems to be a sigh of relief from investors, but that is likely to change.
Between now and the next Fed announcement in March, I expect to see Bitcoin’s price go up again, maybe back above 40K. But no matter how high the price goes now, it will probably drop again when the Fed changes its policy.
I’m still optimistic about Bitcoin long-term, i.e., five to ten years. But short-term, we’re probably in for a bumpy ride. Again, this is not financial advice, but times like this I believe are the best to buy and hold. I’ve talked about dollar-cost averaging (DCA) before, and I believe that is the best way to do it.
Dollar-Cost Averaging: The Best Way to Buy
With dollar-cost averaging, you spread out your investment over weeks or months. Let’s say you like the price now and want to buy $1000 of Bitcoin. Theoretically, you could have bought close to the recent low, say $32K. But we only know that was the bottom with the luxury of hindsight. Say I did that, and then the price dropped to $25K? I would be kicking myself. “Missed that opportunity!” With DCA, I say instead, “Oh wait, I didn’t miss it. I’m still buying.”
That’s what I like about DCA. You can set any amount and frequency you want (hourly, daily, weekly, monthly). It saves you from having to time the market (which mostly comes down to dumb luck), and it saves you a lot of frustration. It is literally set it and forget it (unless you decide to change). You don’t worry when the price goes down. In fact, I’m happy when the price goes down. I’m not a professional investor, but I understand it’s better to buy low than high.
Do you still want to DCA if the price shoots up, say, 10 or 20K in two weeks? Personally, I might pause at a time like that and wait for the price to come down again. Some people might take profits then. You can sell using DCA as well. The process is the same. You just set it to sell on a schedule instead of buy. Some people just let their DCA keep going no matter what the price does. That means they buy the bottoms, tops, and everywhere in between. It still works out pretty well on average.
If you are interested in setting up DCA, I use Delta Badger. It works on several exchanges with no transaction fees. It’s free for up to $1200/year in transactions. There are paid options as well. If you use this link, you’ll get 10% off. Even if you use the free option, the discount is still good if you decide later to upgrade. I’m still on the free plan myself. And if someday I am in a position to crossover to a paid plan, what I would save in transaction and gas fees would be worth it.
Keep calm and hodl on.