If you’re going to be playing the unpredictable game of the bitcoin market, then you need to be aware of how to control your emotions in times of distress and joy.
Professional traders understand that short term swings are going to happen in particular types of assets, especially something as new and volatile as bitcoin. In order to lock in long term profits on your trades, it’s important to remain practical during the rise of a bubble and after it begins to pop. Here are some of the most important tips to keep in mind when it comes to making the right decisions during price rallies and crashes.
Don’t Ever Declare the End of Bitcoin
The most common reaction to a crash in the bitcoin price is to declare that the digital currency is finished and there is nothing that can bring it back from the dead. There have been multiple media outlets that have declared the end of bitcoin over the years, but the cryptocurrency has managed to take those accusations in stride and continue to grow over time. As early as 2011, relatively large media outlets were claiming that the end of bitcoin had arrived, and there are still people making that same statement today. To make sure that you don’t fall into that same boat, it’s important to make sure that you understand why you’re purchasing bitcoin in the first place. If you believe in the long term viability of bitcoin as a currency, then you won’t have to worry about controlling your emotions during an inevitable downturn.
Don’t Expect Bitcoin’s Volatility to End Soon
Another thing to remember is that bitcoin is going to be volatile for many years to come. This is the world’s first digital scarce resource, so it’s going to take some time for it to find its proper market value. Some are saying that bitcoins will be worth millions of dollars each in the future, while others seem to think they are worth nothing. Many have noted that bitcoins will either be worth quite a bit or nothing at all since the very beginning, and it’s hard not to be a volatile asset when the valuations of a single bitcoin vary so wildly from person to person. When the price of bitcoin crashes during these early times, try to keep a cool head while many others are claiming that the end is near.
Understand the Bitcoin Hype Cycle
Now that we’re getting into the large price swings found in bitcoin, let’s take a look at the overall hype cycle. Understanding this hype cycle will help you realize when others are buying high and selling low. The first thing you need to realize is the hype cycle starts from a small increasese in the bitcoin price. This is sometimes noticed by the media, who will then start talking about how bitcoin is making a return and could go higher over the short term. This brings in new buyers who don’t understand the fundamentals of the digital currency, and the price increase and media attention tends to compound on itself for a few days, weeks, or months. At a certain point, some of those newcomers who have no idea why they purchased bitcoins in the first place will begin to cashout. After all, they cannot be sure if the price will continue to go higher in the future. As the price begins to dip, other newcomers will realize that they should cash out their bitcoin holdings as well. This leads to a crash in the price because all of the newcomers who don’t have strong hands will decide to leave the market. The good news is that the bubble will also attract newcomers who learn about the technology and fundamental value of bitcoin, which means the price is always a bit higher than the point where the bubble first began.
Set Long Term Price Points
One last thing to remember when it comes to controlling your emotions during bitcoin’s vicious price swings is to have long-term price points (Read more at Trading Tip: Buy Bitcoin When There’s ‘Blood in the Streets’ and 7 Simple Rules of Bitcoin Trading That Can Get You a Higher Profit). In other words, you shouldn’t be worrying about short-term volatility at all. That volatility is always going to happen as long as bitcoin is still trying to find its market value, so it’s a better idea to stick with long-term price targets. Many institutional investors who have entered the bitcoin market aren’t looking to change their position on bitcoin for another year, five years, or even longer periods of time. When you think long term, it becomes much easier to stay calm and not panic when the price has skyrocketed or crashed.