What if the Bitcoin Top is in? A Hypothetical Scenario to Help Manage Emotions.
Bitcoin & Altcoin Market Analysis & Weekly Insight #14
What if you’re just starting to invest in Crypto today? What if you are buying Cryptocurrency expecting a massive rally to end 2021, but instead, for one reason or another, the top is close to being in? What will you do then?
Historically, Cryptocurrency has gone through boom and bust cycles. One cycle saw the boom in 2012-2013, followed by a bust in 2014-2015. Another saw the boom in 2016-2017, followed by a bust in 2018-2019. Currently, we are in another boom cycle, beginning in 2020 and so far continuing throughout 2021.
My thesis continues to be that we are still some months away, if not longer, from reaching the end of the current boom of this cycle. However, in this week’s newsletter, I would like to discuss the hypothetical notion that we are to see a premature end to the current boom. Premature in the sense that, either, the cycle ends before December this year, or that prices do not carry on as high as we expect.
What would happen to your portfolio or your savings, and what would you do after the crash? Scramble to get out with what money you have left? Or perhaps you would freeze in disbelief as you watch your life savings erode over the course of subsequent years. Whatever you would do, if you haven’t already thought about what you will do at the end of this boom cycle, now could be a good time to start forward planning.
I want to say that I do not know at what price the cycle top will come, nor do I know whether Bitcoin will follow a 4 year cycle, or if an expanding cycle will come into play.
What I do know is that, at some point, a cycle top will come in. Prices will go through a period of decline, we will be in what people call a bear market. This could be a 40% decline, a 90% decline, or anything in between. What I also know is, as the manager of my own personal portfolio, it is my job to prepare for this eventuality, and navigate it to the best of my ability.
One way that I can do this is by managing my emotions, and therefore managing my expectations. A sobering hypothetical I use is this: ‘What if we see a long and harsh correction? What would I do?’, in other words, what if the cycle top is in?
Many of us fall victim to our emotions, and the main two culprits are fear and greed. Greed leads to us over exposing ourselves to the market at suboptimal points in time, often resulting in unrealised losses and/or realised losses. Greed can also mean that we choose not to take profits, expecting prices to go way higher than they already are, despite the reality that our positions are already significantly in profit. Fear, on the other hand, can lead to us selling our positions, when in fact it could be one of the most optimal times to buy, just as everyone believes Bitcoin is dead or that Altcoins are going way lower.
Alternative.me have a fear and greed index which uses multiple data points to score the market fear & greed from a scale of 0-100. The closer to 0 the score is, the greater the market fear. The closer to 100, the greater the greed. It is a measure of market sentiment.
Up-to-date fear & greed scores can be found here
As this chart does not have up-to-date Fear & Greed data, for reference, the Bitcoin fear and greed index currently gives a reading of 76.
To keep the emotion of greed in check to make sure I am not over exposed to the market, I often use the hypothetical of ‘what if this is the top?’. This allows me to take profits to the point at which I am comfortable with what I am holding in the event of a severe correction.
As a result, I end up mostly holding tokens which I am investing in for longer periods of time, tokens that I fundamentally believe in, and tokens I have done extensive research on. Additionally, I sell off any excess holdings on these tokens so that I am not risking capital I cannot afford to lose in the event of a correction that goes much deeper and lasts much longer than I anticipate.
Truthfully, this doesn’t always work, sometimes I have still found myself in trouble, holding tokens which I shouldn’t, having expected more wild gains to come at the time of purchase. That said, this hypothetical can still be a useful tool for navigating the markets during periods of extremely bullish sentiment.
The message here is to always wait for the best opportunities to take position. This is not financial advice, but this is the way I now approach the market. Generally, the better opportunities to enter comes in periods of market fear, at the lowest prices before a major trend reversal, from bearish to bullish. The lowest point, the ‘through’, is the maximum point of financial opportunity, and this is where I aim for when I accumulate.
‘Aim’ is the key term here, just as I do not expect to sell the exact top, I also do not expect to purchase the exact bottom, just somewhere close preferably.
The ‘what if’ hypothesis helps me to take profits, I do not expect to sell at the top, but I do intend to sell what I need ahead of any severe corrections. Furthermore, mindfulness towards market participants’ emotions of greed, as well as my own, help prevent me making purchases at time such as now, where Bitcoin is making new all-time highs.
This does not mean that I won’t stand to gain from an expected continuation of the bull run, after all, I still hold sizable allocations to a range of Cryptocurrencies, but I’m not over exposed, and that’s the key here.
I hope that today’s edition of the Confident Report, being slightly different to our usual technical analysis focus, helps you with your own assessment and navigation of the market. The way of thinking detailed in this newsletter certainly helps me with my own navigation of the markets.
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