Unrealistic volatility expectations

Price/volatility expectations have gotten pretty far out of hand. Just a year ago, the price was around $ 650. $ 650! Now I'm seeing some people here who seem to be kind of freaking out because the price dropped somewhat from $ 3000. Look, the Bitcoin price is on an absolutely ridiculous upswing which is rather likely to be a bubble. If you're trying to get rich quick by dumping your retirement funds into BTC at $ 3000, then your "investment strategy" is not much better than someone betting everything on a game of roulette. High-risk-high-reward investing is not necessarily bad, but you have to seriously look at your thought process to make sure that you're not:

  • Being blinded by dreams of getting rich quickly, similarly to people who dump money on very-negative-EV lottery tickets.
  • Getting wrapped up in "HODL" memes, reddit comments, and other groupthink, which is sometimes fun, but absolutely the last appropriate source of investment advice.
  • Acting based on panic thinking like, "OMG the price is going to $ 100000 and I will miss my chance forever if I don't buy right now" or "OMG the price is going to $ 0.01 and I will miss my chance forever to retain some value if I don't sell right now".
  • Investing more than you can afford to lose. Bitcoin is HIGHLY, HIGHLY speculative. No investment advisor would tell you to put all of your life savings into MSFT or whatever, and MSFT has a market cap 14x larger than Bitcoin. Although I believe that it is very unlikely, there are several ways in which the value could drop precipitously, even to zero. For example, there is no mathematical proof that the cryptographic algorithms used in Bitcoin are actually secure — they are merely believed to be secure because nobody has been able to break them after many years of intense scrutiny. (I'm not here recommending "diversifying" into altcoins — altcoins are almost all complete trash, and price-wise they follow BTC but with even more volatility, so they're not really useful for diversification.)

It is entirely possible that the massive price increase over the last few months is based on lasting fundamentals. In addition to the fairly recent subsidy halving, the world fiat-based economy is in many ways on very shaky ground, and getting worse all the time. There are many good reasons why BTC should have a larger market cap than every fiat currency combined (probably in the very-long-term, if it occurs). It's even possible that the price will increase further this year; even $ 5000 wouldn't surprise me too much. But for goodness sake, don't think that Bitcoin is the first-ever infinite-money generator that will continue to rise exponentially forever (in real terms). I can nearly guarantee that there will be a large and long-lasting crash/downturn at some point. Maybe it will be $ 3000 to $ 1000, maybe it will be $ 10000 to $ 5000, who knows. But if you're thinking for example that the current $ 1250+ price range is absolutely secure after only existing for a few months, then you're traveling blind through very dangerous territory.

I am not in this post attempting to:

  • Get you to sell. If I'd bought BTC at $ 3000, I would probably be disinclined to sell at this local minimum.
  • Prevent you from buying. If you're looking to buy, a local minimum like the one existing now is often a good time to think about doing so.
  • Tell you to buy or hold. If you will be financially ruined if BTC drops to $ 700, then you should probably consider selling ASAP: Bitcoin is far too risky for that. And you should never buy more BTC than you can afford to lose.
  • Give any specific investment advice.

If you are a Bitcoin true believer, then I think it's a good strategy to dollar-cost-average slowly and then avoid ever "cashing out" in any major way. Then you don't have to really worry about the price. The idea of course is that someday the idea of "cashing out" will become irrelevant.

If you are treating BTC more like an investment that you will eventually cash out from, then you should wipe the dollar signs from your eyes and think more like a boring investment advisor. It'd probably be a good idea to avoid buying more than a few percent of your net worth in BTC, periodically rebalance to avoid exceeding that percentage if the BTC price rises, maybe place stop-loss orders, etc.

submitted by /u/theymos
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