Bitcoin’s price dropped more than 11% and the overall crypto market cap lost almost $30 billion in the last 24 hours. The drawdown happened suddenly, which has left many of our clients and friends asking “What the hell just happened?!”
There is no need to freak out. Here is what you need to know:
- Volatility is relative — Bitcoin, and the broader crypto market, have been surprisingly non-volatile in the last month or two. In fact, Bitcoin was less volatile than the S&P 500, DOW, and NASDAQ for an entire 30-day period. Many investors were lulled to sleep by the lack of price movements, so yesterday’s unexpected drop feels more violent than it really is. Double-digit percentage price movements, in either direction, have been commonplace in crypto for years.
- Don’t believe the conspiracy theories — Crypto enthusiasts and market analysts love a good conspiracy theory. They are already claiming yesterday’s drop is because of an upcoming Bitcoin Cash hard fork, whales manipulating prices, or the response to the IMF’s recent comments around encouraging state-backed digital currencies. While these explanations are entertaining, they are completely devoid of evidence or merit. The truth is that no one knows what drove the price movement and we are better positioned to evaluate the situation moving forward if we admit that to ourselves.
- Stay focused on long term trends — It is incredibly hard to predict short-term price movements, but much easier to measure and predict longer term trends. Many of the most well-respected minds in the industry have been calling for a market bottom around $80 billion total market cap and Bitcoin price in the $3k – $4k range. Who knows how accurate these predictions will be, but it is important to understand the “we are in a bear market and it is more likely prices continue downward before they recover” sentiment.
- Refrain from acting emotionally — Markets are built on volatility. Traditionally, capital moves from the emotional to the emotionless, so you have to resist the desire to react. Sometimes the best action is no action. The best way to achieve this discipline is to do your own research, develop a thesis, create a plan on how you will act (dollar cost average in or out, etc), write the plan down during a non-chaotic time, and never override the plan. You can hear more about this if you listen to my interview with quantitative investor Jim O’Shaughnessy.
- Psychologically we need more pain — Markets don’t historically bottom until some portion of the participants capitulate. The most bullish folks have to begin to question their conviction. There has to be a belief that the asset could go to zero. That Bitcoin won’t survive. At that point, and only at that point, will we reach a true bottom. Unfortunately, I don’t think we are anywhere near that today. There is a lot of pain left to come. Get ready for the blood in the streets.
Source/More: Volatility is back, baby!