The Ups and Downs of the Crypto Roller Coaster
Hard lessons. Hard decisions. And survival.
Photo by Priscilla Du Preez on Unsplash
I knew nothing
I enthusiastically bought my first sliver of bitcoin in 2017. I was hugely pleased with myself for figuring it all out and my small investment was appreciating handsomely. I was ahead of the pack, and riches were ahead—just what I needed to restore my balance sheet post-divorce. Towards the end of 2017 the price of bitcoin was accelerating quickly upwards, and I was piling in money. Along with all the other mugs.
I was a mug because I knew virtually nothing about bitcoin. I wasn’t investing. I was gambling. I didn’t know about the bitcoin halving cycle. I didn’t know anything about the psychology of markets. I didn’t know a ‘whale’ from a retail investor. I didn’t know what exit liquidity was, and I didn’t know that I WAS exit liquidity.
Christmas 2017 was looking good. Bitcoin was just about to break above $20,000. And then disaster struck. Bitcoin started its rapid descent, losing 65% of its value in just over a month—and this was followed by an extended period of pain where bitcoin almost touched the depths of $3,000. Despite losing over 80% of my bitcoin investment (and various alternative cryptocurrencies), my belief in the technology and the ongoing innovation was unwavering. I held on tight, and eventually, three years later, bitcoin reached its previous end of 2017 high.
I was finally back ‘in the money’. And this time I was educated. I knew how bitcoin technology worked, I know what miners were, I knew that rewards to miners were cut in half every 4 years, and I knew how bitcoin’s price related to these things.
So the big slide following bitcoin’s November 2021 high of almost $68,000 wasn’t quite as painful as my early 2018 shock. I was able to protect my ‘stack’ much better than I was able to in 2018. Don’t misunderstand me—the past 18 months haven’t been pretty, but I’ve been able to survive and get myself ready to make (and take) profits during the next bull run.
You can only start from where you are…
You only really start learning about crypto when you’re IN the market. But you can do your best to understand where we are in the cycle before going all in!
If you’re like me, you won’t get very excited about the idea of analyzing charts of bitcoin’s price. But do pay attention to the Fear and Greed Index. This index uses social signals and market trends to determine the overall sentiment of the crypto market, based on bitcoin and other large cryptocurrencies.
If the market is behaving with greed, then prices will already be relatively high as buyers pile in. The smart people will be selling their assets in times of extreme greed, because they understand that a price correction is imminent. If the market is behaving with fear, then prices will be relatively low and many sellers will be taking loses. The smart people will start to accumulate their assets again in times of extreme fear, because they understand that the market will inevitably rebound.
It’s not rocket science, and few people will time things perfectly, but this simple understanding could help you to make a good start in crypto. Or avoid making a bad start.
Two smart strategies…
On December 18, 2013, GameKyuubi posted to the bitcointalk forum, "I AM HODLING." He was trying to say that he was committed to holding onto his bitcoin. But he was a little drunk, and his typo-laden post has given rise to the now-famous misspelling of "holding."
— “What Is This Bitcoin Thing?” by Marco Hødd
As the market heats up and becomes more euphoric, you should NOT be buying. You will be paying too high a price if you get caught up in the enthusiasm to buy. Your choice is either to HODL, or if you want to realize some profit, this is the time to sell. And perhaps this is the hardest thing to do—to sell in a rising market. But if you push greed to one side, you will see this as the sensible option.
So the first smart strategy is knowing ‘roughly’ where we are in the cycle and buying and selling accordingly. The second smart strategy is knowing how to buy and sell. Dollar Cost Averaging.
Imagine we are around the bottom of the cycle, and it’s a great time to buy bitcoin with your $1,000. Now you could simply go ahead and buy $1,000 of bitcoin in one go—and you’ll do just fine because you’re buying low in the cycle. However, a better approach is to buy smaller amounts regularly over a period of time. As a strategy, this reduces the impact of short-term volatility by averaging things out and ensures that you don’t overpay because you happened to buy when bitcoin zoomed up in price for just a few hours. Or imagine if bitcoin continued to move down in price after you bought it. Buying in smaller amounts regularly over a period of time would enable you to secure a better average price. Spend some time Google-ing “Dollar Cost Averaging” and actually put the approach to use. Remarkably few people do—all too often, people are in a rush to ‘get in’—and it’s often not the best thing to do.
Regular investing in this way works well over the long term. For example, if you have $600 a month available to buy bitcoin, buy $150 every Monday at 10 am. Or, even better, you could buy $20 every single day at 10 am. Many platforms will manage this for you automatically. You could easily move your dollars once a month to Coinbase and set up an instruction to buy $20 of bitcoin daily on autopilot.
The same strategy should also be used when selling. Don’t sell all at once. Sell in smaller amounts regularly over a period of time to reduce short-term volatility. Also, if you sell in a rising market (before the ‘top’), you will achieve a better average price.
One final thought. As I said earlier, selling when the market is going up is very, very hard to do. It could (and probably will) go higher. But I can tell you that most people who hold out for the ‘top’ end up losing out on a good selling opportunity because they just can’t face selling when bitcoin is on its way back down into the next ‘bear’ market. I’ve found it much easier to sell, say, 70% of what I have and let the other 30% go a bit higher. When it does, I sell another 70% of what I have and let the remaining 30% carry on. Of course, eventually, the price will correct, and I can choose to sell the remaining fraction at a lower price or HODL for the next cycle. “Not financial advice” as they say, but I’ve found it to make sense.
A HODL approach with Dollar Cost Averaging for investing and withdrawing funds saves you from the emotion that would otherwise accompany your decision-making. You’ll have heard the term FOMO—the ‘fear of missing out.’ Just like me, many smaller investors have rushed to buy bitcoin as the price started to rally. They don’t want to ‘miss out.’ But if you are holding for the longer term, say five years or more—the price you buy at and the timing of your purchase aren’t so relevant. Stick to buying little and often—regardless of what is going on with the price action.
Over time, you’ll begin to see the patterns. You’ll know that a price drop always follows a big rally. Celebrate when the price falls. This is when nervous smaller investors typically sell because they fear losing more money. The larger investors, the so-called ‘whales,’ will be BUYING MORE at this time because, from their vantage point, bitcoin is currently ‘on sale’!!
Was I smart during the bear market?
Well, what I can say is that I’ve been smarter during the 2022 bear market than the 2018 bear market. Rather than HODL, I pushed the sell button at around $42,000 when bitcoin was on its way down from its all-time high price of almost $68,000. The timing was not perfect by a long way, but I was finally taking a profit on my 2017 bitcoin purchases and I moved my money into various Decentralized Finance (DeFi) protocols with the aim of generating income and growth during the bear market.
More learning for me—this time about DeFi. Some of my investments have turned out well and others have been disasters. But on the whole, things are looking OK. There is widespread agreement that we’ve passed the bottom of the current bitcoin cycle and I have started to use income from DeFi to start buying small amounts of cryptocurrency every month. I will DCA like this consistently for the next year or two as the Fear and Greed Index starts its journey back to ‘Extreme Greed’.
If DeFi is new to you, you might like to read a little more detail in this post…
Did you find this post helpful? Please share it with others you know who might benefit from reading it.
Marco Hødd is a crypto enthusiast and global nomad. He is the author of the book “What Is This Bitcoin Thing?” and the “Crypto Matters” newsletter on Substack.
Please note that the information contained within this newsletter is for educational and entertainment purposes only. All efforts have been made to present accurate, up-to-date, reliable, and complete information. No warranties of any kind are declared or implied. Readers acknowledge that the author is not rendering legal, financial, or professional advice.