Should You Buy Bitcoin Right Now?
Bitcoin’s been in the news recently because of its recent parabolic increase past $40,000.
Then it dropped back down and has been wavering back and forth ever since.
Some are saying this time’s different. PayPal is now backing the cryptocurrency, banks are jumping on the bandwagon and many are comparing it to gold as an “asset.”
If we look closer, though, there are a lot of similarities between now and what happened back in 2017.
And if history tells us anything, you might be in for a rude awakening if things turn sour.
Just take it from a colleague of mine who got swept up in the hype a couple years ago…
“I Swore It Was a Sure Thing”…
In March 2016 a colleague of mine — for privacy purposes let’s call him “John” — heard the rumblings Bitcoin and cryptocurrency were making.
Thinking it was all a bunch of hype and nonsense, he plugged away, putting money aside into his 401(k) and thought nothing of it.
He called Bitcoin “fake money” and said that it had no tangible value.
With no product to back it up, he didn’t see what the big deal was.
Then Bitcoin’s price jumped from $400 to $600. Then from $600 to $1,200. $1,200 to $4,000. Then $4,000 to $8,000.
The financial news media couldn’t get enough of Bitcoin, with headlines predicting that it could easily reach $20,000. Other analysts were saying nothing could stop its rise to heights of $100,000 by the end 2017.
The fear of missing out, or FOMO, had become too much to handle, and John pulled the trigger on a trade.
He looked at his bank account and took out only money that he was willing to lose.
He purchased $198.00 of Bitcoin and $298.60 of Ethereum — another flagship cryptocurrency— on Dec. 12, 2017. The prices were $17,280.01 for a bitcoin and $638.50 for an ether, respectively.
He Waited and Watched…
At first, the week went well for his two purchases. While Bitcoin’s price was sinking a little bit, Ethereum’s movement gave him a net profit. No red flags yet, but it certainly wasn’t the explosive growth he had been seeing earlier in the year.
Then Dec. 22, 2017, rolled around and the bubble burst — the entire cryptocurrency market crashed and John’s account went into the red.
John held his positions until March 31, 2018.
Head down in defeat, John sold his two positions, receiving $80.75 for his Bitcoin position and $187.87 for his Ethereum position.
Overall, a 45.91% loss amounting to $227.98.
And he’s not the only one…
Millions lost their money as Bitcoin tumbled for the next year until finally bottoming out at almost $3,000 in late 2018.
And while it’s easy to say, “I told you so,” there’s a lot we can learn from those who were swept up in the Bitcoin hype.
What We Can Learn From John
Often, you’ll hear the phrase “Buy the rumor, sell the news.” John heard about Bitcoin trading years before when it was less than $100.
He didn’t pull the trigger, though, until the financial media got ahold of the rally and bitcoins were already thousands of dollars higher.
This was his first mistake. He got caught up in the fear of missing out and paid heavily for it.
His second mistake was not setting his own investing rules ahead of time.
For instance, if he had put into place a “mental stop” of 25% gains or losses, he would have cut his losses early and would’ve been able to recoup 20% more of his cash back.
There are, however, some things that he did right in his purchase.
He wasn’t using the grocery money to try to win it big — instead, he wisely only used money that he wouldn’t be heartbroken over if he lost.
Furthermore, John didn’t double down to make up for his losses when prices dropped.
Had he done this, he would have been even more in the hole as prices continued to drop for another nine months after he sold.
So Should You Buy Bitcoin Right Now?
My opinion is if you’re in this for the long haul, I would say no. Bitcoin’s market right now is a speculator’s market. Single-day swings of 20% are common.
If you do plan on getting in on the action, don’t bet the farm on it.
Size your positions, avoid the hype and set your trading rules ahead of entering a position.
This is especially true when trading highflying assets like crypto or small-cap tech stocks.
Just a couple of extra minutes of planning can save you from losing your shirt on the next “hot” buy.
To a bright future,