There could be some overlap between the properties of cryptocurrency and stocks, but certain differences are stark and persistent. Among them is volatility, as even Bitcoin (CRYPTO: BTC), the cryptocurrency with the biggest market cap, is prone to sharp and sudden drawdowns.
Cryptocurrency is supposed to be the people’s money, and I’d hate to see anyone take an unnecessary loss from trading Bitcoin. So, if you’re reeling from recent events in the crypto-sphere, I offer you a quick dose of perspective on the power of doing absolutely nothing. For example, a $100 Bitcoin investment five years ago would be worth $370 today.
After resting comfortably at $29,000 for a solid month, Bitcoin took a breathtaking drop to $26,000 the other day. That’s a 10% cliff dive in just a few days. But unlike investors in the realm of stocks, Bitcoin traders can’t cite an earnings report or a disappointing product launch as a cause for the drop.
Asking why it happened is a natural response, but it might only lead to frustration in this instance. The general consensus seems to be that the Bitcoin sell-off was prompted by the one-two punch of hawkish-sounding statements from a Federal Reserve Board meeting (“… most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”) followed by a Wall Street Journal report that Elon Musk’s SpaceX had sold its Bitcoin holdings.
The financial press needs something to talk about during a slow, low-volume summer for stocks, and the Bitcoin rout provided ample fodder for commentators.
So, all of a sudden, folks are worried about SpaceX’s crypto holdings (or lack thereof). In their panic, they apparently forgot that financial behemoth BlackRock is working on getting approval for a spot Bitcoin exchange-traded fund (ETF).
Now, that’s newsworthy. BlackRock’s clout is considerable, its pockets are incredibly deep, and a spot Bitcoin ETF would truly be a game changer. BlackRock’s crypto involvement matters much more than SpaceX’s trades. It may even, perhaps, be more essential than the Fed’s economic outlook, which can change from one meeting to the next.
If these considerations aren’t helping you sleep at night, feel free to take a glance at Bitcoin’s history of drawdowns. If you’re going to HODL (hold on for dear life) with calm and confidence, you’ll need to make volatility your friend (or at least a roommate you can live with).
After all, Bitcoin has had multiple drawdowns of 30% or more. I can’t make any guarantees about the most recent pullback from around $69,000, but previous crashes invariably resolved with new Bitcoin bull markets.
In addition to learning one’s history, it certainly helps to maintain small positions with cryptocurrency. Thus, a mere $100 stake in Bitcoin five years ago, when it was trading at around $7,000, would have resulted in an immediate 50% crash as the digital coin fell to $3,500 in early 2019. But then, turning a $100 investment into $50 shouldn’t be too painful for most investors.
Fast-forward to the present, and with Bitcoin’s price gyrating wildly but landing near $26,000 from the starting point of $7,000, that $100 investment would now be worth approximately $370. That’s an impressive return on one’s capital, just for having sat on one’s hands for half a decade. It’s true that you could have cashed in your Bitcoin position for $980 at the very peak in October 2021, but that’s an unrealistic target and almost everyone missed it. Patient ownership over the long term beats quick-draw day trading almost every time.
Ultimately, the events concerning SpaceX, the Fed, and even BlackRock shouldn’t be of life-changing consequence to investors who are willing to stay small and extend their time frame.
And just remember that a dose of perspective is an effective sleep aid for headline-harried HODLers when Bitcoin bends and buckles.
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