It is pretty safe to say that the majority of new investors in cryptocurrency are there because they have heard of the amazing profits earned by other investors. Even though they may be warned of the potential risks and wild volatility, many come to expect nothing but gains, and are not prepared psychologically for any downturns or losses. In our world of instant gratification, they want the gains to happen now, and pay little heed to what it actually takes to build something of value. Everything is fine as long as the market is rising, but panic sets in every time the price falls. It happens over and over…
It starts with herd mentality – following the latest ICO, or a flashy new blockchain project looking for a problem to solve, or any other venture with a lot of hype surrounding it. And, typical of a herd, the sheep will eventually follow each other off of a cliff. They may even feel they have done their research and really believe in this project, but their research may be nothing more than reading up on the developer’s big plans via a whitepaper that is at best, a weak promise. By following the herd, whether it is by listening to an uninformed writer who recently discovered bitcoin (and thinks they’re an expert), believing the unsubstantiated hype of those promoting their self-interests, or crowd-following in order to belong to the “in” community, a follower will inevitably hang onto the cryptocurrencies they should get rid of, and get rid of the ones they should keep.
Adding Fuel to the Fire
The herd mentality makes you feel as though you are at the center of the action, and the level of exhilaration can take on a life of its own. You begin expecting returns to repeat those of early investors – “If so and so made millions of bitcoin, then so can I.” Any warnings of risk are either dismissed, or acknowledged but not heeded, with the general consensus being “it is different this time”. The majority of the participants in this youth-dominated cryptocurrency industry have little or no previous investment or business experience, and those more experienced investors that are just just discovering cryptocurrency, may not understand what the technology can and can not deliver. Both groups are fueling the hype, and both are having difficulty identifying projects that constitute real value. Following standard advice such as “buy the top 10”, or buying the one that has increased the most in price (not to be confused with value), is typical herd mentality.
Sitting on the Sidelines
While fear of missing out (FOMO) is a characteristic of herd mentality, there is a flip side that causes a level of anxiety that can keep you out of the market altogether. FOJI, or fear of jumping in, can set in when one is constantly bombarded by headlines of market bubbles, crashes, shady exchanges, stories of loss, scams, etc. Fear overpowers, and there never seems to be a right time to invest. Even though it is almost impossible to do so, not being able to accurately gauge where the market is at or where it is heading, keeps these skittish investors perpetually on the sidelines. Sitting out can also happen when someone, in an attempt to time the market, sells and waits to re-buy at a lower price that never happens. One of the saddest scenarios in my opinion, is that of someone so terrified to take any risk at all, they do nothing and end up losing wealth by hanging onto a depreciating dollar.
No Time for Emotions
Watching every little up and down price move can cause some anxiety, but the wild volatility of cryptocurrencies with the occasional ups and downs of 50%, can induce sheer panic if you are not prepared for it. Those that buy when the price has risen substantially, so they can “get in while they still can”, and then panic sell when the price drops because they need to “get out before it’s too late”, have usually lost sight of the big picture. If they had done proper research on the project, set aside all emotional attachments to their ‘favorites’, and asked themselves some tough questions on their currency choices, a long term trend of steadily increasing intrinsic value should be evident. Has the development team actually done anything that will bring real value to the currency (other than making grandiose plans)? Are they working on something that solves real world problems? Can their plans or strategy be replicated easily by one of the hundreds of competitors? Will the average Jane and Joe off the street use this? Does the price accurately reflect the value? Value is not the same as its market price, and “everybody wanting it” isn’t yet an accurate measure of value in cryptocurrency, because no currency to date has made any significant inroads in attracting the mainstream public (the “everybody”).
Market Timing Reality Check
Beware of claims of great returns earned by timing the market, made by anyone that is earning a commission on your trades. Most financial advisors can’t predict even a general market top or bottom, let alone the exact top or bottom, so why are you demanding that level of clairvoyance from yourself? Sure market timing could save you a lot of money during a bubble, but the problem is there is no way to confirm a bubble exists until after it pops. History has shown us that the highs and lows can last for years, both capable of going much farther in either direction than anyone expected.
“The only value of stock forecasters is to make fortune-tellers look good.” Warren Buffet
“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.” Peter Lynch
Use Dollar Cost Averaging
For the majority of investors, financial success comes from a long-term savings plan with regular contributions made to a diversified portfolio. Cryptocurrency has the potential to offer unprecedented returns and has a place in that diversified portfolio, if you can tolerate the roller coaster ride as it matures. With its sometimes explosive volatility, it is perhaps the perfect candidate for dollar cost averaging, especially for new or nervous investors.
Dollar cost averaging is a method of investing in which a set dollar amount is used to purchase a particular investment every week, month, or some other predetermined time interval. If the market declines, your set contribution amount will buy more ‘shares’, coins, or tokens. Dollar cost averaging does the decision making for you, helping to minimize the fear, unproductive emotional responses, and the uncertainty of when to invest. Regularly making small investment purchases over time can make it easier to handle a downturn, knowing you will be able to accumulate more units for the same dollar amount. The greatest amount of panic during price corrections tends to occur with the investor that went ‘all in’ at the height of the market, and inadvertently ends up doing the exact opposite of effective market timing.
People spend more time fretting over the price and second guessing their decisions, than they do actually researching a cryptocurrency to see if it is a good investment. Cryptocurrency is so new, and with rampant speculation causing wild price volatility, it is more important than ever to choose a researchable and verifiable development team with a project of substance. We are so early in the cryptocurrency evolution, the question should be what to buy, and why it’s a good investment – if you can get that right, the when will take care of itself.
Cryptocurrency is not a sure thing, and the risk is something investors bear for the chance of a huge return on investment. The lower the volatility, the more predictable the return, and a predictable return is usually a low return. If you don’t have an appetite for risk, and are looking for less volatility or downside risk, you may be better off waiting for the industry to mature, and buy the successful currencies at a much higher price.
RISK = REWARD