Bill’s Blog | July 5, 2022
Let me provide a historical perspective on Bitcoin. Bitcoin was the first cryptocurrency launched in January 2009, and it has had four crashes of over 50% and averaged an 85% decline in value. So the sky is not falling, and Bitcoin will likely not go to Zero anytime soon. Having said that, the crypto market crash this year has been severe and most likely still has not bottomed.
I entered the crypto market in 2017 and did very well because I traded and took gains off the table. However, I exited the crypto market in January of 2018 (there was a two-year crypto winter), and I started building a position in 2020. In 2021, the crypto market started to take off with innovations in the DEFI space (Decentralized Finance), the NFTs (Non-fungible tokens), and crypto gaming became hot. As a result, many project values skyrocketed, and colossal money was made in this speculation craze to those who traded and took profits (I did well again and fully exited in Feb. 2022). The market action was no different from the internet dot-com boom of the late 1990s. The same pattern plays out when the value of a stock or a crypto project gets hyper-inflated. Boom and then bust!
Bitcoin continues to be the leader in market-cap, and what Bitcoin does, the market follows. Bitcoin has a four-year cycle based on design and a halving event (the number of tokens paid to bitcoin miners decreases by half), creating scarcity. Historically, once the halving has happened, the price shots up for a year or so, and then the decline or a crash follows.
Many experts have warned for years that many projects would fail (up to 95%). I agree with this thesis. However, multiple project failures (bankruptcy) have occurred in the last few months, starting with LUNA. Leverage kills when the assets supporting the project crash. When I do crypto consulting, I strongly warn never to borrow money to buy crypto assets. In the 2008 stock/real estate crash, highly leveraged companies (over 60% debt to their equity) had a high failure rate. Debt can be very dangerous in market crashes and lead to many bankruptcies.
So, what key lessons can we all learn from the recent cryptocurrency crash?
- Crashes are typical in all speculative assets.
- The media or misguided individuals claim Bitcoin is dead. This false claim has been reported hundreds of times since 2009.
- Never leverage with speculative assets as the losses become magnified. Only put money into speculation that you can afford to lose. Please do not borrow against your mortgage to purchase Bitcoin, as billionaire Michael Saylor suggests.
- More regulation is required to protect consumers. Often these private custodial platforms do not provide clear and full disclosure of the risks of leaving your assets there.
- Never leave sizable amounts of crypto assets on custodial platforms (DEFI or exchanges) as they can go bankrupt or get hacked, and you lose 100% of your assets. Bankruptcies include: 3AC, Celsius, Block-Fi (bailed out by FDX), Three Arrows, and Harmony has hacked 100 million crypto assets. Most likely, more to come.
- If you build a position in core crypto assets, purchase a cold wallet (not online) and store it in a safe.
- Despite the crypto crash, several quality projects are innovating and moving forward. Please do your research BEFORE you ever invest a dollar. Remember, all of these projects are speculation and can fail.
- Now is a great time to start researching and educating yourself on the crypto space if you are inclined to speculate. There is no rush to purchase. Create a watchlist of your top five to ten picks and once you feel we are close to a bottom, start buying small tranches.
- Be a swing trader rather than be a HODLer. (hold on for dear life). HODL may be fine if you have a 10 to 20-year time horizon, but you will go through many gut-wrenching huge ups and downs or a total loss with some of your assets.
- A great place to start in understanding the psychology of the market is to look up a fear/greed index which calculates the market participants are doing: buying or selling. Currently, the market is in extreme fear. Historically, anything below 11 can be an excellent time to start accumulating, but no guarantee that it is the bottom. There are many risks in the global markets, and things can change quickly—It is best to be defensive for the foreseeable future, and no need to risk capital.
- Be patient, and if the general stock market further corrects or crashes (highly likely) due to central bank policies, then the crypto market will crash with it. Bitcoin can quickly drop to 12K or below in this scenario. 12K is 85% from in November 2021 high, and there is no guarantee it will stop there!
- From a healthy perspective, all asset classes have corrected in 2022, and many high-tech companies crashed by 50% or more.
In conclusion, if you need a coach to help you learn about this innovative market, I offer a 3-hour consult at $125 per hour, or I can do a group rate (discounted) if there are six plus people. I cover all the essential things you need to learn (plus homework) before you invest. I can do this online with Zoom or in-person in Fraser Valley, BC.
All the best in 2022,
Bill Westmacott, Owner
fivefoldfinancial.ca
bill@fivefoldfinancial.ca
778-539-7107