When the cryptocurrency market decides to fall, there is no bull that can hold support; it's bottom followed by bottom, and just when you think the price has already dropped a lot, there's room for more blood.
After the brief signs of recovery yesterday in the cryptocurrency market, the situation has devolved into a rather bleak scenario. Bitcoin (BTC) crashed below BRL 190,000, with a -20.43% loss in just one week, according to CoinGoLive.
If you have recently arrived in the cryptocurrency market, you must have been startled by the 30% drop in one month. According to the market's Fear and Greed Index, most investors are also scared. But there is no reason to despair, as Cointimes will help you wipe away your tears and stay focused on your investment strategy.
Why does Bitcoin drop so much?
The simple math of mean reversion and/or the emotional gravity of taking profits makes price pullback inevitable after a bull run.
In addition to the fact that bitcoin is a fledgling and highly volatile asset, this volatility is normal, and over days, or weeks, these corrections are small compared to bitcoin's parabolic upward movements.
In the chart below we have in red the biggest losses and in blue the biggest possible gains of Bitcoin in every day since January 2018. See that the two movements are very broad, but the rallies have a much larger size.
Note that the scale is correct, as the biggest loss was 82% and the biggest gain was 1,987% – a 24 times ratio, which is very difficult to find in any other asset.
Exchanging for kids, cryptocurrency drops a lot because it goes up a lot. Volatility and convexity are two characteristics that can help you in the correct allocation of assets in your portfolio.
A convex scenario is one where the losses are limited and the gains are unlimited. In investments, convexity is ideal for people who don't like risk and who are looking for solid long-term enrichment.
So, there are two reasons why bitcoin has convexity.
At a high level, base layer protocols like Bitcoin and Ethereum are creating a ledger with considerable immutability where value and contracts can be exchanged between two parties. This network is only of value if the security is strong enough, that is, the network is only reliable if we don't have to worry about a rollback of previous transactions.
Technically, the value of the network increases as the price increases. This reflexivity means that (1) the network effect in crypto networks is strong and (2) immutability, hence the value proposition of the network increases with price, which makes unlimited gains possible.
The second reason is related to the allocation of crypto assets in your wallet:
On a microeconomic scale, a call option has a negative Theta, which means that over time, the value of the call option will decrease as optionality decreases.
This is due to the Lindy effect, which says that the future life expectancy of a non-perishable thing like technology increases over time. Unlike call options that expire at a certain time, bitcoin does not expire. Instead, it proves itself over time and becomes more reliable as time goes on.
On a macro scale, by having 5% of crypto assets in your portfolio, you are exposed to an asset class with limited downsides and unlimited upsides. This has the added advantage that you can take much less risk with the rest of your portfolio.
Read More: Bitcoin is a Nobel Prize-Winning Diversification Strategy, Says The Economist
Instead of cultivating a portfolio of bonds with average risk and average return expectations, you can build a portfolio where 90 or 95% of the portfolio has very little risk, perhaps just enough to cover inflation, while the rest of the portfolio has advantages. unlimited. Mathematician and risk analyst Nassim N. Taleb describes this Barbell Strategy as follows:
“If you know you are vulnerable to forecast errors and accept that most risk measures are flawed, your strategy is to be as hyper-conservative and hyper-aggressive as possible, rather than being mildly aggressive or conservative.”
What to do after crying
Even with a 20% loss in 7 days, there is no reason for novice bitcoiners to despair. It is in these moments that our conviction in Bitcoin is tested and it is also when the most pessimistic news appears in all the newspapers to make the atmosphere even more tense.
What we have to do when witnessing any abrupt movement in the price of bitcoin is take a few steps back and take a deep breath. Try to figure out whether or not your investment strategy is too bold before selling your entire position at a loss in hopes of buying again when the price drops further.
For if, instead of falling further, the price rises (as it usually does) your loss is embittered. This calculation is called opportunity cost, the cost of a decision or transaction in terms of the opportunities forgone for that decision or transaction to take effect, considering that every application of resources can have an alternative destination.
Read More: The Feynman Technique – 4 points to improve your crypto learning
If you are not confident in BTC in the long term, it is worth reviewing these points so you don't suffer from tears on your face and holes in your wallet when selling. The sale of bitcoins can be done through a dollar-backed stablecoin, within brokerages or wallets, generating the possibility of annual returns on earn or staking platforms on Binance, Bybit, BlockFi, or similar, if you feel comfortable with the risks. .
Another way to sell your bitcoins and remain exposed to the cryptocurrency market is to diversify. Some crypto tokens and projects are not correlated with bitcoin movement and you can find them using TVL.
Understand: How to use TVL to find good projects
However, if you are confident in the long-term thesis of bitcoin, it is best to forget about the price a little, so as not to be affected by volatility while you keep your coins stored and immobile in your wallet (your psychologist will thank you).
In addition, you can take the opportunity to buy more satoshis at low and take advantage of these moments to improve your average recurring purchase price – a strategy called the Dollar Cost Average (DCA).
Rather than being constantly speculating, simply recurring buying has proven to be an extremely profitable strategy considering Bitcoin’s insane uptrend since its birth in 2009.
And to buy constantly without worrying about short-term swings, the best strategy is to secure a subscription to Coingoback Loop. On the platform, you will be able to track your portfolio balance, profit, average purchase price and the amount invested.
In addition, you can withdraw the bitcoins to your wallet after 1 month of the first one, to guarantee the custody of the coins and guarantee the hold strategy.
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