A surefire way to get rekt in any market is to buy or sell based on emotion. All too often you hear about newer investors buying the tops and selling the bottoms.
By following the initial rules of the game in part one, newer investors can avoid making the mistakes that many others have made. Newer investors in the space are much more likely to buy into pumping markets and sell into dumping markets which can scare people out of crypto, or leave a negative attitude towards crypto for years to come. This is not financial advice but generally keeping emotions out of investing carries many benefits. Emotionless investing leads to greater confidence, mental fortitude, and a greater understanding of your investor thesis.
Volatility in Crypto
Crypto is much more volatile than most standard assets that are available for trade. In order to remain in crypto and prosper, investors must learn to be able to stomach the ups and downs, and ebbs and flows of the market. Seeing your 50,000$ portfolio get cut in half during a crash can be frightening, this can shake the strongest hands into selling. In these scenarios one must look back at their initial investor thesis. Have the fundamentals of the investment changed? If this is not so, do remember all markets are manipulated up and down, and if you believe crypto is the future, dollar cost averaging the dips can help reduce your average buy in. Dollar cost averaging when the market is crashed, or in a bearish trend can highly increase overall profit in the future.
Panic Buying and Selling
The same rules apply for panic buying, when a new asset is pumping and the fear of missing out is strong, panic buying into pumps is generally ill-advised. The chance of buying the top is much higher when buying an asset that has pumped for a few weeks, this was noted when BTC briefly reached the mid sixty-thousand dollar range. People who bought the top will not be in profit until BTC nearly double at its current price of ~34,000. The same was seen when Elon Musk was pumping dogecoin regularly and people were buying the coin at seventy cents. Doge today is only nineteen cents, 72% below its all-time high. As boring as dollar cost averaging can be, it is a proven strategy that has worked for decades for many successful investors. Afterall, our retirement accounts use dollar-cost averaging and lead to compounding returns over the years.
Timing the Market vs. Time in the Market
Another very important concept is timing the market vs time in the market. Timing the market should generally be left for the professional trader, and even in that case it exposes the investor to increased risk with each trade. Above is a chart that shows how successful the dollar cost average strategy has worked for BTC holders over the last ten years.
Since its inception, all buyers of BTC excluding the spring of 2021 correction would be in massive profit. Time in the market generally provides the big rates of return people are looking for. With patient hands and a strategy, investors can grow their wealth over time while outperforming the traditional markets. Investors that have dollar cost averaged through bear markets are in the highest profit. Another great example of time in the market is Cardano. Below we can see the price of Cardano in January of last year courtesy of [coinmarketcap]. Buyers who purchased around January are up about 37x, this translates to about 37,000$ with a 1,000$ initial investment. Buyers who dollar cost averaged over several years are in exponential profit likely attaining life changing wealth.
The final concept to set forward is that you only lose money when you click that sell button. By eliminating emotion-based trading investors can increase their success and confidence. If you believe in your investor thesis, and the fundamentals of a project, it is much easier to cost-average during large crashes and corrections. This same idea was brought to fruition in the stock market during the Covid-19 crash. Investors who held through the horrendous crash were mostly up by the end of the year, dip buying was incredibly lucrative for most fundamentally strong stocks and cryptos. Learning to buy opposite of market sentiment can be greatly rewarding, selling when others are overly optimistic and buying when an asset is oversold. Warren Buffet never hesitated to remind us, “be fearful when others are greedy, and greedy when others are fearful”. Please look out for part 3 of the series!