Sound Money

Crypto volatility is tough to digest for new holders. Here are 5 pointers to assist you in this process (purpose, strategy, price sensitivity, expectations and cheaper):

1. Purpose: Why did you purchase?

If you have a strong fundamental reason for holding an asset, its easier to digest volatility. For example, I think bitcoin creates a competing financial system that could eventually address many of the negatives of the current financial system. A lofty goal, but if it is reached, bitcoin will serve a much higher purpose than merely improving my financial wealth.

A higher purpose reduces my sensitivity to the short-term market price of bitcoin. Moreover, lofty goals like this are only attainable over long periods of time, which reduces short-term volatility concerns.

2. What’s your strategy?

Your purpose could be different, and that’s fine. It just helps to think it through. Even if your strategy is merely to make money, that’s fine. Just take the question one step further, “how do you plan to make money? Based on what information? What is your strategy? Are you a long-term investor, or a short-term speculator?”

There are a multitude of different reasons for holding an asset. The clearer your strategy, the easier it is to stick to it. Just thinking that the price is going to go up is not good enough. If you’re in this camp, then maybe you need to use this time to develop a deeper fundamental reason for holding? Unless you’ve delegated your investment management to someone else, you need to think this through yourself. Once you’ve formulated an idea, try vocalise it to someone. It doesn’t have to be perfect. Each time you try, you’ll improve.

3. Reduce price sensitivity

If you are trying to learn the art of trading, then perhaps you will become consumed by daily price action as you develop a framework for buying and selling. As much as online advertisements try to suggest that trading is an easy way to make money, its not. Trading requires a specific combination of skills. Consistent positive performance for extended periods of time is notoriously difficult. Trading isn’t for everyone and it doesn’t have to be your strategy. Some excellent investors almost never trade.

If you’re not a trader, daily price movements don’t mean a huge amount to you. I know its tough, but if you have a long-term motivation/purpose you need reduce your sensitivity to the price of bitcoin (or other crypto). Ask yourself, “what does it help to be so concerned about the price? What value does this create in my life? What am I learning?”

After you’ve reaffirmed your why, purpose and strategy, use this energy to learn something new about the technology or environment. There are multitude of topics to wade into: coding, full nodes, privacy, monetary policy, regulation, etc.

Lastly, if you do have a higher investment purpose, like the one I stated above, has an added externality. If bitcoin comes anywhere close to achieving this outcome, the price will be substantially higher than today further reducing short-term volatility concerns. That’s why you see some bitcoin HODLers talking about $200/300K bitcoin when the price is falling. It helps them to contextualise a $2/3K drop in price vs. potentially massive upside.

4. Expectations

What did you expect to happen? I don’t mean this sarcastically. Really, “what did you expect to happen?”

Bitcoin is one of the most volatile assets in global financial markets. Apart from stablecoins bitcoin is the least volatile crypto currency, so if you’re assessing eth or defi projects you need to scale up your volatility expectations. Peak to trough bitcoin tends to fall between 70% and 80% during bear markets. That’s almost unheard of in traditional financial markets. During bitcoin bull-markets (when the price is trending higher towards another record high), price corrections in the 30% range are not unusual. The 17% fall we’ve seen in the price in September 2020 is small relative to these historical incidences and it pales in comparison to the 50% correction in March 2020. So I ask again, what did you expect?

While volatility is always difficult to digest, this information is pubic knowledge. Did you really expect your favourite crypto to increase in a straight line after you bought it? How logical was this expectation? Appreciation of historical volatility and reconciliation with your expectations should reduce your concern when prices decline.

5. Cheaper is better

If you have a strong fundamental reason for holding an asset, then a lower price should make the asset more attractive because you are able to purchase it at a cheaper price. If I had a dollar for every person who told me “I cannot buy bitcoin now, its too expensive.” Well, here is your chance, it just got cheaper!

Conclusion: As with everything in life, challenges are opportunities to deepen our knowledge and grow. Crypto price volatility is no different. I know how tough it is - I am also consumed by the bitcoin price - but we must try and peel ourselves away from the narcissistic fascination with price. We must use our energies more productivity to learn about coding, full nodes, privacy, monetary policy, or regulation. Avoid focusing on the price.

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