Part 2 – How To Survive Cryptomania
This is part 2 of a 4 part series meant for new cryptocurrency investors to read before entering the space. The goal of this series is to determine if it investing in crypto is the right move. Head to the cryptocurrency section for more information and links to the rest of the series.
For the sake of brevity when I refer to Bitcoin just assume I am referring to any other coin or token available as well (Ether, Ripple, etc.). This series is not exclusive to Bitcoin but rather should help you understand what investing in cryptocurrency would mean for you.
This series will help you determine your motivations for wanting to invest in cryptocurrency, prepare you for the psychological games of a bubble, understand the risks involved in this new and volatile asset class, and help you determine if you have the right kind of money available to get the best result possible.
Part 2 – How To Survive Cryptomania
Bubbles are only evident in hindsight after they have popped. Cryptocurrencies have seen a huge growth in 2017 and the start of 2018 has been strong for the sector as well. Asset classes are always in some stage of a bubble. There very well likely continue to be quick run-ups in price followed by even quicker spike downs. However, one day there will likely be a massive sell-off that takes a long time to recover from. At this point, the media and people who like to hate on cryptocurrencies will say that the bubble has popped and it is over. The truth is no one actually knows anything. Price could easily get back to new highs after some time or it could never get back there, no one can tell with any certainty.
So for now, if you decide to invest, you need to be aware that things which go up really fast in price are equally likely to go down in price even faster. Realize you will have to hear people from all over talk about the bubble we are in. But when you hear this bubble talk know that every price dip does not necessarily mean the bubble is popping and trying to call the top of the bubble is futile. The experts you see in the press are awful at predicting prices and should basically be ignored. Everybody has an opinion but no one can predict the future and anyone who pretends to is someone to steer clear of.
Fear of Missing Out (FOMO)
The concept of FOMO is a big part of massive speculative valuations when the underlying asset isn’t fundamentally yet worth it’s price. FOMO occurs when you hear stories about how much money other people are making or you see price continually move higher and just can’t take missing out on the next move so you finally decide to buy in. You may make money reacting to FOMO so long as the music keeps playing and cryptocurrencies keep going up. However, those players that only enter the space purely out of FOMO are the first to be shaken out of there positions when the market retraces.
Be aware that you will hear stories of people quitting their jobs to trade cryptocurrencies fulltime. You will know someone who knows someone who recently became a millionaire. People who make money after there first few trades will think they are some kind of crypto trading genius and that this is too easy. Let me be frank, anyone can get lucky and make money when the entire market is going up. Crypto is not any different than the dot-com bubble. You can literally throw a dart at a dartboard full of token names and make money in this kind of market right now. The thing to remember is that this won’t last forever, you are not smarter than the market, and when the party is over you need to dial it back in. The people who can really get hurt when things take a turn are those people who convinced themselves that they are different/ they are special/ they are a trading expert- don’t fall into this line of thinking.
History Does Repeat Itself
I have been involved in this space since 2013 and I was professional full-time speculator for 7 years so I have seen markets and history, quite frankly, does repeat itself. I don’t like the idea of calling it a bubble b/c “THE” top of the bubble is only evident in hindsight. There have been many local or short-term tops followed by sharp pullbacks, sometimes retracing as much as 80% from highs. For some perspective, a pull of 10-20% in the US stock market is extremely rare for a single day or even week and often signals a bear market.
I want to remind you of the risks – if you think you can buy bitcoin here with a few thousand dollars and make a risk free profit, no- there is a tremendous risk and no reason why price “has” to do anything (including continue to go up). Yes it might happen but the people who mortgaged their houses to buy bitcoin years ago and are now millionaires are not geniuses, they are idiots. They are lucky that extremely risky bet paid off but if they keep taking huge risks like that eventually it will lead to financial ruin.
Go Forward with a Clear Head
Stay smart and stay safe. People get lucky and like to talk about how they weren’t lucky but figured it out for real this time! As soon as real money is on the line people tend to lose rational thought and it is easy to get swept up into the mania. I promise you there will be a lot of people that lose money but you will hear mostly the stories of those who didn’t, please remember that no one can predict the future.
Hindsight bias will continue to run rampant and people will say things like ‘if only I bought it here and held it a little bit longer, I’d be rich!’ No shit, anyone can say that after it happened.
Moving forward I want you to feel comfortable ignoring the press, the “experts”, and your friends who think because they are making money in crypto right now have it all figured out. Set your own goals, do your own research, accept the reality of the situation, and by being aware of some of these external influences at play hopefully you can stay rational, calm, and objective rather than get swept up into the mania.
This is part 2 of a 4 part series meant for new cryptocurrency investors to read before entering the space. Head to the cryptocurrency section for more information and links to the rest of the series.