That’s easy, HODL! Okay, but what else can you do when bitcoin price is falling and the crypto market turns bearish? Let’s go through together the options you can choose from when the price of bitcoin is decreasing.
During the last couple of weeks bitcoin’s price turned into red and there was a gradual decrease you could see on the cryptocurrency market. We are not going to dig into the underlying causes, rather let’s explore what are the option you have when markets are in red.
Cryptocurrency prices are famous for being volatile. The whole asset class is relatively new compared to other types of traditional assets like fiat currencies, gold or stocks. The immaturity of the market often leads to sudden crashes which wipes out hundreds of millions of dollars within just a matter of days.
So one day you have just woken up and you see a bloodbath on the market. Bitcoin just lost 20% of its value. What do you do?
Things to do when bitcoin price is falling: ask questions
Are you a buyer or seller at this price?
First, you have to ask yourself the question: are you a buyer or a seller at this price. Sounds simple, right? It is. If you would buy at the lower rate, you just simply need to hold to your position, if you would sell, then sell it.
Let’s see an example. If you buy for $10000 and what you bought is now at $8000, you have a $2000 loss. Selling has nothing to do with it. What if you sold for $8000 and bought it back 5 minutes later for $8000. How is that different than holding at $8000 what you bought for $10000 or if I buy at $8000. Both of us own now an $8000 asset. Realize that holding and buying are economically the same.
What is your investment horizon?
You need to decide how long term have you invested in bitcoin and cryptocurrencies. Bitcoin has been experiencing some serious corrections in the past. Look at the below charts. When the bottom price was reached around 80% of value has been lost, but the time needed for each downturn varies from 2 days to 400+ days.
At the same time, there were huge rebounds in prices.
- 9x over 5 days in 2010 from $0.008-$0.08
- 10x over 5 months in 2010 from $0.08-$1
- 40x over 2 months in 2011 from $0.07-$30
- 14x over 3 months in 2013 from $15-$213
- 12x over 2 months in 2013 from $139-$1132
- 20x over 7 months in 2018 from $1,000-$19,800
If you look at these time horizons, you can clearly see it DOES matter how long are you planning to invest in crypto. You have to decide on your investment horizon to see the big picture.
Let’s say you are a short term trader. Then look at the short term charts and create a range based on indicators where the price could go in the near future. Setting up ranges can help you to set stop losses and take profit trades which can ensure your risk is limited and your profits are captured accordingly. If you are a swing trader, look at 3-4 weeks time horizons. If you are a long term investor, consider if this is a buying/holding opportunity for you (see above) or the time has come to cash out your hard-earned profits.
Things to avoid when bitcoin price if falling: avoid panic
It is impossible to catch the exact market bottom
So you decided you are a buyer at the current rate, but still hesitant as you want to catch the bottom? Timing the market is extremely difficult and has proven to be a strategy that is just simply not working. If you constantly try to buy at the lowest possible rate you will probably end up in missing good buying opportunities if prices have rebound before your targeted bottom price as you are still waiting for the good entrance – which eventually will never come.
An even worse alternative is when you THINK the market is at the bottom, and suddenly it just crashes more, you panic and sell your fresh position. This is a guaranteed loss.
Switching between coins randomly won’t help you
So you might have heard about the altcoin season, when the price of altcoins increases as bitcoin price declines. You would even think that if bitcoin price is falling you might reallocate your money into another altcoin. But do not just jump into the first coin comes up green on the charts.
Do your due diligence first as you had done when you invested in bitcoin in the first place.
Wait, you haven’t done any research when you jumped into the bitcoin wagon? In this case you should also read about FOMO. Trading is full of psychology. Don’t make long term decisions on short term feelings.
Looking at the red charts all day will make you insane
When markets move against you, you might feel the urge that you constantly have to watch the price to see what’s going on the market. During normal market terms you would not do this, right? If bitcoin would be moving sideways for weeks I bet you would not look at the charts at all.
You have to set proper stop losses for your positions and stick to them. If the stop price is triggered then sell your position, take the loss and move on. If your stop price is not yet reached, let it go and find something else to do. Pre-set risk management helps you to make clear decisions even if your mind is full of thoughts and questions. Looking at the charts turning into deep red will not help you to make a rational decision as your emotions could override your strategy.
One thing you should always bear in mind: trading is risky. Your capital is at risk. It is possible that markets turn against you and you lose everything you have invested before. Even more, if you are using margin trading.
Make sure you know what you are doing, try to understand markets and the technology as much you can. Do your homework, read the charts and do not panic.