When Bitcoin is going down in value, it can feel scary. Some people have significant investments in the coin, and whenever that sort of money is at stake traders are bound to get nervous.
According to analysts and traders with years of experience it’s important, however, to not let your fear control how you trade. In this article, we’ll be going over what not to do when Bitcoin price begins to tumble
How the Market Works
In order to know what you shouldn’t do during downturns in the Bitcoin market, you need to understand the basic tenets of how markets work.
Markets, whether you’re talking about stocks or cryptocurrencies, function on a system of cycles. This is the natural ebb and flow of value that keeps the metaphorical wheels turning, and they are always a part of a healthy market.
- Accumulation: This phase is what we consider to be the start of a market cycle, following directly after the final Downtrend phase. Once the market has found its bottom, everything begins anew. Interest grows among early adopters and institutional investors, who are able to accumulate the asset at a heftly discounted price due to the recent downtrend. After enough of the asset has been accumulated, the market progresses to phase two.
- Markup: The market has become stable again, and the value of the offered asset starts a slow but steady increase. Renewed media attention on the asset sparks new positive sentiment among the public. The general public, who are your average traders or retiree investors, start buying up what the initial investors did not, and the price of the asset trends upward quickly.
- Mania: As a result of constantly increasing value, the run of the mill investors become overly optimistic regarding the future of the asset. Since few things on the markets will stay valuable forever, this leads inevitably to the cycles final phase.
- Downtrend: Early adopters and institutional investors take advantage of the greatly increased value to reap profits, selling off the asset. The value of the asset begins a downturn, but much of the public assumes this to be a normal fluctuation in the value. Eventually everyone figures out what the future has in store for the asset, and the public starts selling it off too. This perpetuates a downward spiral. As more people sell off the asset because of its falling value, the faster the asset will then lose value, which in turn will cause even more people to sell it. Eventually the asset falls to its market bottom, with the asset now far cheaper than it was at its peak. A new round of early adopters can take advantage of this, leading the market back into the accumulation phase.
As you can see from the descriptions of the phases, a market cycle is powered by emotion and public sentiment. It goes from skepticism, to optimism, to delusion, to disillusion. Understanding that the flow of the market will influence investors in this way is the best way to combat those effects.
Now that you understand the basics of the market’s inner workings, and how its going to affect you, lets cover what you shouldn’t be doing during a downturn.
1. Don’t Panic!
There is a lot on the line. Your capital might become stuck in the market, you might lose a lot of money. These are the fears that are played off of during the downtrend. It’s entirely normal to feel this way. If these feelings weren’t evoked, the market likely wouldn’t work as well as it does. But you can’t let fear and pessimism control the way you trade. Doing so dooms you, making you subject the whims of the market in a way that’s only going to hurt your portfolio in the long run. You know that the market will eventually bounce back, because that is how the cycle of the market works.
2. Don’t Sell!
The first instinct a trader will have when they see a downturn occuring is to sell off the affected assets, the idea being that their fiat currency will be worth more in the end than the tumbling asset. While in the short term you’ll be preserving the greatest value by exchanging your Bitcoin for your native fiat currency, in the long term you’ll miss out on the increased value the coin will eventually hold once it has progressed from the Downturn phase to the Accumulation phase. You might argue that you’ll be able to buy the Bitcoin back up once you realize that it has bottomed, but the reality is that, as it is with most other traders, you won’t notice when the market phase changes. Its entirely possible you’ll miss the next buy in point, forcing you to buy the Bitcoin back at a higher price than you sold it at in the first place!
Of course with no guarantee that the market hasn’t finally failed, how do you give yourself the greatest chance to retain value? Hedge your bets. By all means, sell some of your Bitcoin for fiat. By decreasing your overall investment while retaining a portion of it, you’re able to prevent severe damage to your portfolio while still positioning yourself to take profits in the likely event the market continues its natural flow.
3. Don’t Exchange!
Worse perhaps than simply selling off Bitcoin during a downturn is exchanging it for a different cryptocurrency. Doing this not only denies you the profits in the event of the market bouncing back, but you’ll likely find that the cryptocurrency is decrease in value soon too. While not every currency is going to be in the same phase of their cycle at the same time, most will follow the general trend of Bitcoin due to it being by far the biggest and most well known, with many even thinking of Bitcoin as a store of value. If the behemoth is falling, the ants are probably going to be crashed too.
In the unlikely scenario that you find yourself holding a currency that doesn’t fall in value with bitcoin, you won’t far much better. By the time Bitcoin has bounced back to an acceptable degree for you to reinvest in it, your money will be tied up in a cryptocurrency which is just entering its Downtrend. This means you won’t be able to exchange for Bitcoin at a favorable rate, instead being stuck with the lower valued currency.
There is a reason ‘hodling’ is a much favored strategy among online investors. If you trust in the long term viability of blockchain currencies, you need to be willing to see it through these temporary downturns.
Another good idea in cases like these is the option to use trading bots. These bots are connected to a user’s crypto exchange and make trades on their behalf. Apps such as Bitcoin Loophole can help you protect your assets on crisis time and they can possibly help you profit during the market downturn.
In a market which is driven by the ever changing emotions of those who trade within it, only those who can remain calm and remember how market trends have worked in the past can truly thrive. So, clear your mind, breathe steadily, and HODL.
This article is not financial advice. The content above is strictly the opinion of the author. Do thorough research before investing in any asset.