How to mitigate Bitcoin price drops?

Bitcoin

In the world of Cryptocurrency, Bitcoin is the big gorilla. And when a big gorilla drops on you, it’s a bit scary.

If you read about Cryptocurrency, you’ll hear the word “volatile” a lot: this means that the price can change quickly, and by a substantial amount (10% in a day isn’t uncommon, either way). If you own some, looking at a red bar telling you that you’re theoretically 10% poorer isn’t a lot of fun.

Top tips:

If you’re holding long-term, don’t keep looking at the price! This doesn’t mitigate any price drop, but it does save your sanity!
Don’t invest money you can’t afford to lose. Seeing your mortgage money for the next month disappearing because of volatility isn’t the most stressful thing in the world, but it’s close!
Trading is difficult. Exchanges are the cheapest place to buy Crypto, but they’re also a great place to lose money.
Don’t let Crypto sit idle – there are ways to make it work for you.

Volatility – change is scary

But why does Crypto change so much? Believe it or not, Bitcoin isn’t the most volatile Crypto: not even close. Much smaller Cryptos/tokens are much worse, to the extent that a single “whale” (someone who owns a lot of the tokens) can unbalance the market.

This is simply because of the way trading exchanges work: the more tokens there are on sale, the more difficult it is to move the price. Bitcoin has a huge volume of transactions a day, so it actually takes a lot to move it.

So why does it move? The common reason given is that Crypto is “sentiment-driven”. The theory is that bad news (or even fake bad news, such as “India bans Crypto”) makes everyone sell their tokens in a panic. Equally, websites covering Crypto prices have a pressing need to explain any price movement by referring to something that happened that day/week. The problem in that explanation is that when the price does move dramatically, it does so in a very short space of time: around 30 minutes. So, how likely is it that all those Crypto holders all read the news at once, login, and sell their Crypto into a falling market like complete newcomers?

The simple answer is: they don’t. Obviously, some will, but not enough to move things substantially.

But why does it actually move that much? Well, there are two reasons. One is automated trading and bots (often badly written). The other is gamblers.

Gambling is not good for your health

One of the most lucrative (but most dangerous) ways to make money on Bitcoin (or other Cryptos), is to bet on it going up or down in the future at a centralised exchange. These bets are called “shorts” (betting it will go down) and “longs” (betting it will go up). If it goes too far the wrong way, your bet gets “liquidated”, and the exchange uses your money to put in lots of orders for Bitcoin at whatever price it is.

The main problem is that these people use what’s called “leverage” to make bets up to 100 times bigger than the money they have (borrowing Crypto to do it). The more leverage a person takes, the less Bitcoin has to move price-wise before wipe-out.

So, a small market reaction to bad news can be amplified into a big price movement as it wipes greedy people out, causing a chain reaction as a lot of orders are placed on the market in a small space of time.

Can you see it coming?

People who analyse markets use what’s called “Technical Analysis”. This looks at patterns of trades to make predictions. These techniques generally work pretty well in traditional finance, but in Crypto, they just can’t see this coming. And since automated trading bots work on “Technical Analysis”, they tend to get caught unawares (especially since many of them stop trading when prices move too fast!).

Bear Markets

It’s not only Bitcoin gorillas that are scary. A bear market is generally when prices have fallen more than 20% from their all-time high. While the big falls in Bitcoin are scary, bear markets are depressing, unless you’ve got a strategy – then they’re only mildly upsetting!

Stay calm!

This is great advice. In fact, in many ways, the sanest way to deal with Cryptocurrency is to buy what you need, put it somewhere useful (like GCISL.com) and not look at it for five years.

At this point, I should mention FOMO (“Fear of Missing Out”) and “FUD” (Fear, Uncertainty and Doubt). Both of these are perfectly natural things to feel, but for goodness’ sake, don’t take any notice of either. Crypto has had a lot of FUD. For much of its life, it has faced politicians and banks hostile to it. The fear that it would suddenly be banned and crash to zero wasn’t unreasonable (that fear has largely gone away now).

Equally, because the prices rise so fast, it’s easy to get FOMO’d chasing a price you think won’t come down again (spoiler: it probably will, if you’re patient).

Crypto is no place for emotion.

You need a plan

What are you expecting out of Crypto? Quick profits? Or a long-term investment? Perhaps something in-between? How are you going to get your Crypto? What are you going to do with it while it’s sitting there? Are you happy with your asset changing value against the dollar daily?

Quick profits are possible but stressful and it’s much easier to lose than win. For instance, you could watch the Bitcoin price like a hawk, watch for a big 30-minute dip, buy-in and sell an hour later. It’s like catching a falling knife, but it’s a quick 10% or so.

Exchanges actually in the UK are few and far between but include CoinJar UK (limited selection of coins) and CoinCorner (Bitcoin only).

Otherwise, the main parts of your plan are:

What Crypto to buy,
How to buy it, and
Where to put it.

Long-term thinking

For most people, Crypto really needs to be a long-term investment. When you do this, Bitcoin price drops day-to-day don’t really matter because Bitcoin tends up against the dollar over five year periods. This is partly because of scarcity (only 21,000,000 of them can ever exist) and partly due to the fact that it becomes more difficult to “mine” new ones as time goes on.

Legislation will probably bring an end to the worst of the gambling at some point too, at which point a bigger Bitcoin and less gambling will result in a much more stable price.

What coins to buy?

As Crypto goes, the safest ones are Bitcoin and Ethereum: they’re not going anywhere, they’ve survived all the legal attacks, and they’re too big to easily manipulate.

How risky are you feeling? If “value against real-world currencies” is a concern, then you buy Stablecoins (though that’s pointless unless you do something with them – like invest them in an interest-bearing Crypto account). If you believe Bitcoin is the future, you might feel more like maximising your Crypto. Maybe you feel like having a basket of both?

It’s up to you, but the important thing to remember is that unlike in the olden days of yore (2017), there are now companies such as GCISL that offer good rates of interest on Crypto.

How to buy your stash?

Even buying your initial Crypto can be scary: what if you’re buying at the top of a market? What if it goes down five minutes later?

All these are valid worries, though buying Bitcoin on a depressed day makes sense if you’re buying it all at once. For Stablecoins, there’s no bad day to buy.

Many people use “DCA” to mitigate the price of Crypto: that is, they buy smaller amounts at regular intervals and invest it so that the price movements are averaged out. Most financial experts wouldn’t complain at you if you did this.

As of writing, Crypto transmission fees and exchange withdrawal fees are so high that you should buy your Crypto “near” to where you want to use it: buying it in-app if possible so that it goes straight into your account (though you will always pay fees on credit card transactions).