The author is CEO & co-founder of Giottus Cryptocurrency Exchange
Bitcoin hit an all-time-high (ATH) of $65,000 yesterday after a lull of six months. Within a span of a few minutes, it continued to gain momentum and crossed $67,000 suggesting that the euphoria in the ecosystem enticed many new investors to invest at $65,000. Given that the same investors stayed away from the market last month when Bitcoin was at $45,000, we must explore why high prices often invite more buyers while low prices make investors wary of investing more capital. In this article, we try to understand how human emotions drive the crypto markets and how an investor can prepare mentally to handle them.
Like most financial markets, the crypto market generally trends up with time. This is sustained by influx of capital brought in by a growing investor base. It is natural that Bitcoin, which leads the market, will continue to put in new highs with time. But every time it does, there is always excitement and euphoria. Why? We all love a trend and believe that it will continue forever. We believe that if Bitcoin is gaining 10% week on week, it will continue this trend forever. Similarly, if Bitcoin is declining, we should be wary of further declines. This is a natural expression of emotion for most of us. However, momentum shifts happen with every asset. Given crypto’s inherent volatility, shifts are more prominent.
Naturally, we end up acting in the exact opposite way we should be doing rationally. We should be selling at high prices and buying when its going low. But we generally do the opposite. New investors are even more prone to fall for this. How do we manage our emotions then?
The sure shot way to gain in crypto is by being in it for the long term. No Bitcoin investor ever will have a negative portfolio today given it is trending at ATH prices. Instead, if you bought Bitcoin when it was INR 50 lacs a coin and sold it when it dropped to INR 25 lacs, you lose 50% of your capital as well as the future returns you would have got if you had stayed in the market for three additional months.
Another key ingredient is to practice dollar cost averaging method of input pricing. Remember, even if you buy an asset at a high price, the market will eventually bail you out with time. Trust in the market fundamentals and let the portfolio do the work for you. Do not worry about day-to-day changes in price and always try to top up your portfolio if the declines are significant to get a better entry price into the market.
When you invest, always have a target in mind post which you will take out some of your profits. This can be 2x your initial investment or a particular value that Bitcoin must reach. Do not worry about anything that happens in between today and the point in time your targets are met. This way, you are assured of hitting your targets and taking the profits. Only variable is the time taken to achieve them.
What type of capital you invest in crypto is more important than when you invest in the asset. Is the capital completely dispensable for you? Would you lead a normal life if that goes to zero? If yes to both, you can invest and have a peace of mind till your targets are reached. If you are putting in capital that you will definitely need in two months’ time, the market always has a way to surprise you. Given that you can enter crypto positions from INR 100 onwards, do not invest anything more than you can afford to at this point in time.
Also, the blue chips such as Bitcoin and Ethereum are the safest assets given high capitalization and a strong product suite. By keeping a majority of your portfolio in them, you peg your investments to the crypto market in general which has to go up with time.
Globally there are about 120 million investors in cryptocurrencies today. This metric will grow 10x over the next five years, and hence, the overall market will certainly grow in the long term. The best day to enter a position in crypto is today. The best day to exit is when it hits your target. Any day in between is pure noise.
Disclaimer: This article was authored by Giottus Cryptocurrency Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.