If Bitcoin were to crash and lose 95% of it’s value would it result in your own financial armageddon? If so you need to keep reading. Even if a Bitcoin crash wouldn’t cause your financial downfall you should keep reading.
I understand it’s tough to stay rational when Bitcoin up by 100% in a matter of months or weeks. I could continue to be wrong and Bitcoin could double in weeks, months or years ahead and go to $40,000 or $100,000 or the moon.
But before you take out a second mortgage on your house, cash out your retirement, and put all your life savings plus money you’ve borrowed into buying Bitcoin at 50% leverage (all of which I think are horrible ideas)–consider the following six guidelines that will help prevent a Bitcoin crash from causing your own person financial armageddon.
- Don’t Buy Because You’re Afraid of Missing Out
- Only buy what you can Afford to Lose
- Commit a certain amount of Bitcoin your are simply going to Hold
- Take Some Profits off the Table
- Be Content with the Gains you Have
- Diversify
1) Don’t Buy Because You’re Afraid of Missing Out
Fear of Missing Out (FOMO) can strike us all. But buying something simply because it is going up, has gone up or because you fear missing out on future gains is a horrible approach.
I dislike missing out when something is going up too. I struggle with that like many people. But I have to reign myself in and remind myself not to buy simply out of fear of missing out.
There are always more opportunities out there and if you make a bad decision out of fear of missing out you will have less capital to put towards the next opportunity.
2) Only buy what you can Afford to Lose
When an asset like Bitcoin goes up so dramatically people start to think much less rationally. They get greedy and less cautious. They start to think that Bitcoin will always go up–so they start to buy more than they can afford to lose.
This is bad for two main reasons:
1) If your life savings is in Bitcoin and it drops by 20%, 30%, 40% or more the natural human instinct is to sell and stop the pain.
Markets never go up or down in a straight line. Bitcoin is particularly volatile and it has dropped by several thousand dollars before rallying back to new highs. Limiting your speculation to an amount you can afford to lose will better enable you to stomach the inevitable drops and corrections and weather the downturns.
2) Assets like Bitcoin could lose 95% or more of it’s value and never recover. Bitcoin could drop 50% and never make a new high. Even if you hold through a large drop, you may never recover your principle and if you’ve lost more than you can afford to lose you’ll be in a world of hurt.
3) Commit a certain amount of Bitcoin your are simply going to Hold
I bought into Bitcoin when it was trading under $100. I bought and sold it as it went up and down and made some money. But I wish I had held onto some portion of the Bitcoins I had bought (maybe 1 or 2) and just held them to see how high Bitcoin could go. I now have the benefit of hindsight–but it’s better to make that decision up front.
Perhaps you are going to hold (“HODL” in crypto-speak) Bitcoin you buy until you reach age 65. Maybe you are going to hold Bitcoin until it reaches $20,000. Maybe you are going to hold until you can use Bitcoin to pay your rent or your luddite Uncle Ned starts using Bitcoin and it’s reached widespread adoption.
Whatever the criteria you choose–stick to it. I wish I had set aside a percent of the Bitcoins I first bought and decided I was going to hold them based on a rule.
4) Take Some Profits off the Table
I think it is good to have a percent of Bitcoin that you can afford to lose that you are going to hold based on criteria of your choosing. But I also think it is good to take some profits off the table. Lets say you have 6 Bitcoins you bought at $5,000, Bitcoin is trading at $17,000 and you are sitting on $72,000 in profits with a $30,000 cost basis. Consider selling 2 Bitcoins and taking $35,000 in profits. That way you are guaranteed to have made money on Bitcoin and you’re effectively playing with the houses’ money (to use a gambling analogy).
5) Be Content with the Gains you Have
I wish I kept more of the Bitcoins I bought when it was trading under $100. But instead of feeling regret I am focused on the fact that I have made a few thousand on Bitcoin and other cryptocurrencies and I’m grateful for those gains. If you are fortunate enough to have made some gains in Bitcoin be content with those gains and don’t let greed or FOMO get the better of you.
Being grateful for the gains I have made helps prevent me from getting greedy and unwisely putting an amount of money towards the crypto-space that I cannot afford to lose and/or doesn’t make sense given my asset allocation goals.
6) Diversify
I think it is important to diversify across asset classes: stocks, precious metals, cryptocurrencies, I would like to diversity into real estate and into other areas as well.
Part of that diversification includes diversifying within each asset class. I own multiple value stocks in different industries–I own different precious metals and I own different cryptocurrencies besides just Bitcoin.
If you recognize diversification is important don’t just buy Bitcoin. Consider some of the other cryptocurrencies out there. I’ve shared with my newsletter subscribers my own “Group of Six” cryptocurrencies that I’ve chosen to speculate on. Research some of the other tokens or coins out and there if you think they are right for you perhaps you buy those in addition to Bitcoin.
I think it is possible that Bitcoin is the future of cryptocurrencies. But I personally think it is more likely that some other newer and better coin replaces it.
If You Do Want to Buy Bitcoins Here is an Easy Way to Do It
If you’ve decided you want to speculate on Bitcoin here is a way to buy Bitcoins.
I can’t emphasize enough the importance of educating yourself on blockchain technology and the risks of owning cryptocurrencies. Bitcoin could lose 95% of it’s value or more. It could also go to $100,000. I don’t know what the future holds.
Not Speculating in the Cryptocurrency Space is a Perfectly Valid Approach
Don’t let anyone convince you that you NEED to buy Bitcoin or any other cryptocurrency.
It’s a perfectly valid approach to simply refrain from speculating on cryptocurrencies like Bitcoin. It’s a new frontier–it’s very risky and speculating on cryptocurrencies isn’t right for everyone.
But if you have decided to speculate on cryptocurrencies and Bitcoin then consider the above guidelines. They could help you avoid losing your life savings and ending up living in a van down by the river if it turns out Bitcoin is a speculative bubble and crashes.