A Fresh Perspective on 'Buying the Dip' in Cryptocurrency
Written on
Over the span of six months, investing in cryptocurrency is often seen as a high-risk, low-reward endeavor. However, when viewed over a six-year period, it shifts to being relatively lower in risk with the potential for significant rewards. The key is to adopt the right mindset.
We cannot halt our progress; this is an unpredictable journey!
Lately, a surge of articles on platforms like Medium, Twitter, and Reddit has aimed to comfort newcomers during market downturns. Experienced investors often step in to reassure others, sharing their wisdom or seeking validation.
While these uplifting narratives can be reassuring, they often convey the same message. Thus, I aim to provide a more meaningful discourse, aware of the irony that I may be doing the same thing but with more academic references. My main focus remains on development rather than market fluctuations; nonetheless, when the market calls for attention, it's essential to respond.
Understand that this wild ride is far from over, promising more exhilarating highs and daunting lows. It will be both thrilling and nerve-wracking. If you're willing to join, this is the cost of entry: purchase the ticket and enjoy the ride.
This piece revisits an earlier work of mine, which I believe still holds relevance. A solid investment strategy should withstand the test of time. I invested considerable effort into researching and crafting this, so if you find value in it, please support it for wider visibility. Next month, I might return to writing in-depth articles focusing on user experience in Web3 applications.
In summary: If you prioritize safety through established methods—such as dollar-cost averaging, diversifying into large-cap cryptocurrencies, and leveraging compound interest—you are likely to see substantial returns on your investments.
Why Short-Term Losses Are Common
As I age, I recognize that a few years can pass quickly. Traditional investments may yield wealth over 30 to 40 years, while I believe cryptocurrency can achieve similar results in just 5 to 10 years. Though it may seem like a long period, it is relatively short. Shift your perspective from days and weeks to months and years.
Insights on Trading
The average individual investor lags behind market indices by 1.5% annually, while active traders fall short by 6.5% each year.
Only a small fraction of day traders—1.6% on average—manage to turn a profit in any given year.
Most day traders end up losing money significantly when factoring in transaction costs.
The findings of a recent study indicate that the overall performance of day traders is negative, which likely parallels the crypto landscape, perhaps with even more pronounced outcomes.
Anecdotal Evidence from Crypto Enthusiasts
If academic studies don’t resonate with you, here’s a relatable story.
In 2017, two friends and I formed a WhatsApp group to exchange crypto tips. One friend consistently invested in Bitcoin and selected altcoins, while the other dabbled heavily in altcoins and day trading. In a rising market, the latter felt invincible, accruing profits before losing everything. When the market turned bearish in 2018, he continued trading and suffered even greater losses.
By 2020, he had turned against cryptocurrency, lamenting his past losses and viewing it as a scam. At the first sign of recovery, he traded what remained of his altcoins for Bitcoin, selling through Coinbase and exiting the group. Had he held on for just a few more weeks, he would have not only recovered but made a profit during the subsequent upswing.
Conversely, my other friend continued his dollar-cost averaging strategy into Bitcoin and Ethereum and has since seen considerable gains.
Cognitive Biases in Trading
Survivorship bias leads us to focus on successful individuals. When you see someone boasting about their profits from a lesser-known coin, remember that countless others faced significant losses. The likelihood of you being one of those unsuccessful traders is high.
Hyperbolic discounting refers to the tendency to prefer immediate rewards over larger, delayed ones. Many view cryptocurrency as a “get rich quick” scheme. If you’re new, adjust your expectations to a more realistic pace of wealth accumulation, and you’ll fare much better.
Fundamental Principles
These concepts may seem straightforward, but it's beneficial to revisit them.
Dollar-Cost Averaging Explained
Investing $100 in Bitcoin each month for three years would have transformed $3,600 into $10,362 (+187%).
Considering we are currently over 50% down from the peak, this outcome appears even more favorable. Even if you had purchased at the highest point in 2018, you would still be up 300% due to the time spent in the market.
Consistently investing $100 in Bitcoin every month for five years from December 2017 would have turned $5,400 into $22,462 (+315%).
This remarkable result required navigating a challenging bear market for three years, where every month brought lower prices—requiring patience and persistence.
This strategy is effective because maintaining the same investment amount (e.g., $100) allows you to acquire more Bitcoin as prices decrease. Thus, market dips present excellent opportunities.
Explore https://www.bitcoindollarcostaverage.com/ to experiment with your own figures.
Dollar-cost averaging $100 biweekly from May 2016 to May 2022 yields an 800% ROI, resulting in an investment of $15,000 for 5.1 BTC, now valued at $155,000, or even $300,000 just months ago.
While 2016 was an early entry point, it illustrates how time in the market pays off.
Is It Possible to Outperform the Market?
Analyzing the top ten cryptocurrency funds suggests that you might have a good chance.
Data indicates: - Bitcoin and Ethereum have consistently outperformed other investments over time. - Altcoins tend to do well during bull markets. - Overall, cryptocurrencies have outpaced traditional stock market returns. - The potential gains during bullish phases are significant.
From these observations, we can conclude: 1. Disregarding Bitcoin is risky. 2. Ethereum has become a blue-chip asset on par with Bitcoin. 3. Altcoins can thrive in bullish conditions. 4. This year's leading cryptocurrencies may not maintain their positions next year. 5. Reinvesting gains into Bitcoin or Ethereum can safeguard your wealth.
For those interested, delve into Modern Portfolio Theory to understand optimal risk-adjusted returns across various asset allocations. Benjamin Cowen provides insights into Sharpe ratios and the efficient frontier.
Diversifying beyond Bitcoin and incorporating some altcoins can yield better returns than a Bitcoin-only portfolio. However, a portfolio devoid of Bitcoin and only comprising new altcoins is a risky strategy that can lead to severe losses during market fluctuations.
Predictions for the Long Term
Cryptocurrency analysis often receives criticism. While some predictions—like John McAfee's—have failed, that doesn’t invalidate all forecasts. Patterns repeat, trends emerge, and data tends to converge.
There are various forecasts suggesting Bitcoin could reach $100,000. The logarithmic regression model indicates a consistent upward trend with diminishing volatility, making it reasonable to assume this pattern will persist. While there’s a non-negligible chance of Bitcoin plummeting to zero, the current momentum—along with increasing legal acceptance and substantial investments—suggests otherwise.
There will be market fluctuations, but Bitcoin is likely to appreciate over time, offering higher returns than most asset classes. Similarly, the entire cryptocurrency market is expected to rise, with altcoins potentially offering even greater returns. While predicting these gains is challenging, allocating a small portion of your portfolio to diverse coins can provide exposure without excessive risk.
Reflections on Compound Interest
Remember, "not your keys, not your crypto."
However, it’s often said that compound interest is the eighth wonder of the world and crucial for building wealth.
The DeFi boom of 2020 allowed for interest earnings on crypto, creating new borrowing and lending opportunities that bypass traditional financial gatekeeping.
While there are risks, compound interest can significantly enhance your success.
Consider this scenario: - You buy one Bitcoin at $10,000. - After holding for ten years, it appreciates to $100,000.
Alternatively: - You invest that Bitcoin in an interest-bearing strategy. - Earning 6.5% compounded interest over ten years, your Bitcoin would grow to 1.91 BTC. - Resulting in a total of $191,000, which is an additional 91% gain—almost double the outcome of simply holding.
I recommend experimenting with a compound interest calculator.
At the very least, it should encourage you to think long-term.
Currently, the best savings accounts offer around 0.1% interest, meaning you are effectively losing money after accounting for inflation. To keep pace with inflation, you need to earn around 8-9% interest. In contrast, DeFi presents numerous financial tools that can help savvy investors generate yields. Strategies vary in complexity, and all carry risks. If an opportunity appears too good to be true, it usually is—recent failures in the market serve as a cautionary tale.
If yield farming seems daunting, many “crypto banks” have emerged that offer interest on deposits with some level of asset insurance. Notable players include BlockFi, Celsius, Nexo, and Crypto.com. However, recent events have seen both BlockFi and Celsius collapse, raising questions about their solvency. They employ DeFi protocols, but their ability to uphold insurance claims in adverse conditions remains uncertain, though they do provide a more user-friendly way to earn interest.
Investors face a dilemma: DeFi has a steep learning curve, yet using custodial services contradicts the ethos of decentralized digital cash.
This is something to ponder.
Utilize the calculator, input some figures, and see where a 10% interest rate could lead you in 20 years. Even if you started with fiat, the results could be promising. Now, consider achieving even a 5% return on Ethereum or Bitcoin. Add dollar-cost averaging into the mix, and you may be astounded by how much Bitcoin or Ethereum you could acquire over 5-10 years. Reflect on the potential worth of 1 BTC or 1 ETH in a decade. Even conservative price predictions could yield substantial figures—yet you risk it all chasing daily fluctuations.
Engaging in some trading or exploring various DeFi applications can be beneficial, but avoid using your entire portfolio for it.
Take a step back and contemplate the safer, more conventional strategies. You might be surprised at where you find yourself in a few years.
P.S. This is not financial advice, and I personally hold Bitcoin and Ethereum.
P.P.S. If this is your first market cycle and you're experiencing significant losses, don’t worry. Many have been in your position, and it does get easier. Learn from your experiences, remain engaged for another five years, and reduce the frequency of portfolio checks. Improvement will come! :)