Whooooooooooooooooooo now that’s what I call a wild ride.
Both stocks and crypto have had a set of substantial pullbacks lately and if you are new to investing, and especially new to crypto investing, times like these can leave you shaken.
Bitcoin plunged over 45% from it’s high on April 14th and the S&P 500 dropped as much as 4.1%.
As an aside… Note the difference in the scale of volatility between these two asset classes. This is important to understand and something I’ll get to in a moment.
Ethereum dropped 40% all in a span of 24 hours.
Crypto exchanges had trouble keeping up with the trades and Coinbase experienced some downtime while Binance paused Ethereum withdrawals for a while.
Simple put, this is volatility at its wildest.
These types of “red” days never feel good.
I’ve been investing for over 25 years and I still don’t like it, but I know what to do when it happens. And that makes all the difference.
Selling is NOT the answer.
Panicking is NOT the answer.
Taking a deep breath and reminding yourself of your investing principles and strategy IS the answer.
If you don’t have investing principles and a wealth building strategy… then perhaps you aren’t investing at all, you’re just gambling. If that is the case there is good reason to panic. Not because of the volatility, but because you don’t know what you’re doing or why.
But back to the volatility and the crazy selling we’ve seen.
Selling or panicking or both together IS NOT THE RIGHT MOVE.
It’s important to understand that this type of volatility in the world of bitcoin and cryptocurrencies is normal.
YEP.. you read that correctly. This is the world of crypto. Gigantic roller coasters.
During the 2017 bull run, bitcoin experienced multiple drawdowns, some as much as 38%.
In 2016, we saw two pullbacks of more than 30%.
And already in 2021, we’ve experienced four drawdowns in the 20% to 30% range.
So this isn’t the first time we’ve seen drops like this. It happens in a highly speculative, emerging asset class.
But we don’t get to enjoy the massive upside without the inevitable drawdowns.
Volatility is the price of admission we pay so we can take advantage of the potentially huge gains that are only possible in crypto.
The way we combat this volatility is by having a robust risk management strategy. In your crypto investing this means limiting your exposure to 5% of your investable net worth and if you are still building your freedom net worth, never more than 10%.
Added to that we limit the exposure to each individual trade.
This is a NO-BREAK rule of only putting small amounts into each investment, also called a position. You keep this a fixed amount and consistent. For crypto positions I suggest no more than $200-$400 per position. When that position starts increasing in value you also NEVER chase it.
And the most important strategy of all is that we invest in a well diversified portfolio with exposure (investments) in multiple asset classes.
Having investment rules, principles and a strategy to create our sustainable wealth is how we can avoid panicking about these “red” days and sleep well at night.
Perspective is also vitally important. In the crypto world we only have to look back a few months. In December bitcoin was trading at $19,444 and then it ran up an extraordinary 227% gain to $63,000. The point is that with very volatile investments like cryptocurrencies, you get these huge upside gains because there are also huge pullbacks.
So if you’re still feeling shaken by the wild rides, now is a good time to reassess your portfolio, check that your exposure to these very volatile assets is within your portfolio design limit and make sure you’re in a position to handle the volatility.
If you have some money ready to invest, now is the time to get it working for you.
Don’t forget there are still plenty of catalysts for crypto on the horizon.
There are rumors the first U.S. bitcoin ETF will be approved this year. That would be another step toward allowing mainstream investors to easily gain exposure.
Ethereum has its Berlin and London hardforks scheduled this year. Both will help reduce the circulation supply of ETH, which I think will be positive for its price.
And institutions continue to enter the space. Most recently, Wells Fargo said it plans to begin helping wealthy clients gain exposure to cryptos.
Plus, sectors like decentralized finance (DeFi) and non-fungible tokens (NFTs) continue to rapidly expand and receive hundreds of millions of dollars in new investments. Those investments are going to bear fruit over the rest of 2021 and beyond.
So, if you’re a bit shaken, don’t worry. This type of volatility is normal in the cryptocurrency space. But these are the times when it’s crucial to follow a robust risk management strategy and avoid panicking, so we don’t miss out on the massive opportunities ahead.
I hope this helps give you perspective and gives you a good night sleep