Updated: Sep 1, 2018
So I am writing this the afternoon of December 23rd, two days before Christmas. Yesterday was quite a day, pretty much every cryptocurrency was down substantially, some as much as 45 to 50% at their lows. The cryptocurrency correction was all over the news with reports sensationalizing the drop in cryptocurrency prices and adding warnings from various financial experts about how risky it is to invest in cryptocurrencies.
Just for the record, I do not disagree with the warnings, the cryptocurrency market is a very risky place to invest or trade. It is possible to make a lot of money in a hurry but it is also possible to lose a lot also. Investing in and trading the cryptocurrency markets this year overall has been fairly easy especially over the last few months. Pretty much anything you bought went up in value, it reminds me of investing in the stock market starting in March of 2009. You could have picked almost any stock, hung onto it and made a lot of money. But I don't believe it will always be this easy, although I would be very happy if it was. It is very probable that we will see bear markets in cryptocurrencies which will make it very tough to buy and hold. Sorry, I got a little off track, let's get back to the correction.
I am sure to those not familiar with the cryptocurrency markets, the correction we are going through probably seems like the big stock market crashes of the past. What most of those people don't realize though is this isn't that unusual, by my count, there have been nine price corrections in 2017 including the one we are now going through. This chart does not show the last two corrections.
My point is if you want to invest and trade the cryptocurrency markets you have to get used to the volatility. If you are going to invest you either have to hold through corrections and accept that you are going to see big swings in the value of your portfolio, or you need to set your stop losses and stick to them. You simply cannot afford to panic sell every time there is a pullback, it will drive you crazy.
To be clear I am not a financial advisor but if I was giving advice, I would say if you are just entering the cryptocurrency markets. Take your time, build positions slowly and above all do not invest too heavily. If you are constantly worrying about your portfolio then that is a good sign you have too much money at risk, you are too heavily invested. It is very easy to get carried away when you see almost everything making big gains, I have been guilty of it myself. The urge is to go all in, which at times can make you a lot of money but if your timing is off it could cost you a lot of money also.
My reason for writing this was not to give investment advice but to explain that these corrections are just part of the cryptocurrency markets, they are very volatile. The stock markets seem very tame in comparison, you will occasionally get a few stocks that will move up or down double digits as far as the percentage in a day but for the overall market, a 1% move is a pretty big. For the cryptocurrency markets, 1% is nothing, it is not unusual to see them move 10% to 20% in a day or sometimes even more.
As the cryptocurrency markets mature it is likely that the volatility will subside somewhat. For now, though it is just something that we have to expect and for traders volatility is what they love. My feeling is that it may get worse before it gets better due to all of the new people flocking to the cryptocurrency markets, many who have very little or no experience investing or trading. What this does, in my opinion, is increase the chances of seeing panic selling which in large enough quantities could cause large price corrections. The best thing you can do is to relax, take it slow and expect huge price swings at any time. If you can do this it will make you a more careful and patient investor, it will also reduce your chances of panic selling at exactly the wrong time.
Until the next blog post, take care!