I'm writing this on January 17, 2018—if you've taken a look at the charts in the last few days, you've seen that cryptocurrencies as a whole are running red. In the space of a few hours, Bitcoin has corrected down to below $10,000 (coming down from its December high of almost $20,000), and the rest of the cryptocurrency space has followed suit, following the price of Bitcoin (which generally sets the price for the space as a whole).
Right now is a very good time to keep a cool head. It's probably also a good time to step away from the FUD (Fear Uncertainty Dismay) on social media and even in the mainstream media—and there's going to be a LOT of it.
Why is this happening? It's pretty simple.
First, it's due to fear of regulation. Both South Korea and China made some strong moves to crack down on exchanges and even miners. (China made similar moves last summer, causing a steep correction, but the price bounced back.) There are rumors that regulation may increase around the world. If the SEC moves to regulate in the US, that will not be good for crypto as a whole.
Second, a lot of new money went into Bitcoin throughout the latter half of 2017, causing a steep rise. For most of those people, this is probably the first correction they've seen. What goes up must come down, but the question is—will it continue to go up in the long run?
Well, it has every other time this has happened to Bitcoin previously.
In the short term, however, this correction is going to cause a lot of weak hands to sell, which may accelerate falling prices. We may need to steel ourselves for $5-6k BTC before a rally, and that rally may not come for another month or two. Of course it's impossible to predict the future, but it is a possibility.
Third, the approval of Bitcoin Futures has allowed much more seasoned traders to short Bitcoin (that is, bet that it will go down) and play against all of the new retail traders who have barely even invested before getting into Bitcoin. That certainly also has an affect on price action.
But all is not lost. Remember: All that's happened so far is that we've gone back one month in price. One month, in the longer time frame of years of massive gains. Corrections like this are not abberations. They're inevitable. This is where it gets real, and decisions matter much more.
Some people will choose to panic sell.
Some people will choose to hold and be patient.
Some people will choose to buy more—much more—while the prices are down.
And in the next few months, we will know who the winners and losers are.
In the meantime, let's relax and keep things in perspective. Here's a few key points to bear in mind as we go forward.
1. This happens all the time in crypto
Since late 2017, a lot of new people have rushed into the cryptocurrency space, seeing that the price of Bitcoin in particular was rising steadily (and then exponentially) throughout the whole of 2017.
That means that they weren't around for the prior years, when this happened all the time.
All. The damn. Time.
Bitcoin and cryptocurrency have always been this volatile, or more so. The recent smooth growth was largely due to a combination of institutional interest and mainstream awareness. Now, threats of regulation in Asia and rumors of regulation around the world are causing another big shudder. But look back, and you'll see that this has been a routine occurance in crypto. Bitcoin and crypto routinely make massive and even irrational swings that the traditional markets don't. They move faster, more wildly, are more twitchy and generally take people on an emotional roller coaster ride.
That's part of the deal with Bitcoin. It always has been. It's a big factor of getting involved with this game, and it's something I continually counsel my students on.
If you want steady and secure gains, crypto is not the place for you. Stick to nice CDs, bonds and maybe some stable ETFs.
Crypto is where you prepare for this kind of whiplash, you hold on with white knuckles—and you hope for the kind of short-term gains it's much harder to make in other markets. More risk, more reward.
For context, check out this site: Bitcoin Obituaries. It tracks the number of times that the media has declared that Bitcoin is "dead," from 2010 to now. The count is currently at 236. And Bitcoin just keeps going.
2. Put your emotions aside
During times like this, people make rash, reactive and emotional decisions that can hurt them.
First off, if your emotions have completely overwhelmed you, it's probably because you have too much money in crypto. Never invest what you can't afford to lose. With a scaled back position size, you can get some emotional breathing room. That mental trigger of "You know what, even if I lose this all, I'm still fine"—the trigger that allows you to act rationally in crisis periods—only comes with small and reasonable position sizes. If you are oversized in the market, let this be a lesson.
Second, if you have indeed invested in crypto—and done so with the help of a registered financial advisor—you should have assembled a sane plan that you should be able to stick to. Stick to the plan. Weak hands who sell too early can get burned in the long run—but then, so can people who stay in a losing position too long.
If in doubt, talk to a registered financial advisor. If you don't have one, you can find a fiduciary—an advisor who is legally required to put your interests before their own, and charge only on a flat-fee basis—here.
3. In times of chaos, the best way to get control is with better education
I've had some scary moments in the markets. But I've followed one rule that has served me very well.
Every time something happens that goes against me, I respond not by panicking but by taking it as a learning experience and recommiting to my own financial education.
That means I take a step back from the markets, and I hit the books. I study investors and traders. I take courses to learn more skills—technical analysis, fundamental analysis, or how to better understand blockchain technology. Whatever I need to get to the next level. And there is no better investment to make than in yourself.
The cryptocurrency markets may be wobbling for the next few days, weeks, or months. If you're serious about this game, I'd use that time to get better educated. Maybe that means reading more about crypto. Maybe it means taking the time to learn to chart and read white papers. Maybe it's taking my comprehensive Bitcoin Insider training. Whatever it is, use this time wisely, to get an edge on the markets that will serve you well not just now, but long into the future.
Good luck, stay safe, and here's to a 2018 with even higher highs!