When hearing the word “bubble”, people immediately think of something negative and get scared. It’s what prevents so many from getting into crypto in the first place. I believe that all of us crypto enthusiasts definitely are inside of a huge bubble that will keep growing. But what if it was indeed a bubble, and what if it’s not necessarily a bad thing?
I don’t think that a bubble is a bad thing, because I don't know about any bubble that has burst in the past and that has killed the market completely. Markets continue and adapt, and most survivors are the ones that have learned how to educate themselves and are understanding the risks and how things work.
Please don't get me wrong, of course every bubble has a negative side. People lose money, especially those that have no idea about risk management. Just look at what is happening now with the Bitconnect pyramid scheme. I know of people whose lives have been destroyed and I keep reading about families that have lost all their savings. I really hope they will recuperate something, but many of these people are terrified of the Crypto world now.
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Since I started investing in cryptocurrencies, I’ve met people that bought fractions of Bitcoin last December, when 1 BTC was around $18,000. They couldn’t resist the fear of losing everything and decided to sell while we were having this fall of 37% in one week, which represents around 50% compared with the price at which they bought them at.
I also know someone that has been in crypto for over 7 years, and while us newbies were paying attention to this January bloody week, he said:
“guys, guys, guys, don't worry about prices. Just get paid in crypto, cash out what you need to pay your bills every month, and don't look back! That's how the real OGs have been doing it since day one”
His words helped me not to panic, especially coming from someone very experienced. To calm myself down even more, I decided to keep reading about history and check statistics about the Bitcoin patterns, so I chose to compare the month of January of the past 3 years.
This is what I found about BTC price historical data from the site: Market Cap The total market cap in the talbe is te total for cryptocurrencies (1)
- In all three previous years, the big drop happened around the same dates
- The percentage of drops were around the same, 37% for 2015, 23% for 2016 and 36% for 2017
I didn't want to use the data of January 2018 in the table since today's post is of January 20th, but… so far the highest price was on January 5th with $17,712.40 and the lowest on January 17th with $9,511.29. That represents a 46% decrease.
Now, how many times have we seen the price of Bitcoin drop during 2017?
As I know we had had 5 important drops of 35.25% on average, maybe corrections sounds more accurate:(2)
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There are also, of course, plenty of aspects influencing the volatility of the cryptocurrency price, especially these last months:
- It is not a secret that people tend to cashout during festivities and holidays, December for occidental side of the globe and January for the oriental side of the globe.
- Governments trying to regulate cryptocurrencies.
- The Bitconnect scam happening at the same time of this January crash.
- Newcomers panicking, not knowing what to do and looking for fast exist at a loss.
- There is too much misleading information, and this will get worse. Chris Dunn will tell you here:
“Treat the news as it is and do your due diligence”
Bitcoin futures sold on Wall Street can also influence the volatility in price. This higher technical product involves a lot of money and requires a high level of trading experience to understand and make profits with. Basically, you are betting either in favor or against the future Bitcoin price. Many worry about the influence of the media in this, and whether the media is involved in a way with these financial entities to influence the market by playing on the same team.
Here’s an interesting video that explains how futures work: Bitcoin Futures
Now look at this, there has been so much drama and panic in the last 2 weeks, but the fact is that a year ago in January, the highest price of 1 Bitcoin was $1,191.10 and today people are freaking out because it dropped just below $10,000... really!
When the Dotcom bubble burst, I was just a kid graduating from high school. These last days I have been reading about it a lot, and learned that despite the fact that it was isolated within 1 country (USA), the value accumulation of the technology sector in stocks was $2.948 trillions dollars at its peak.(3)
Then I also learned that for the crypto world, the highest market cap has been around $800 billions and is considered the very first global digital asset of its type. If the crypto bubble is anything like the Dotcom bubble, we still have some way to go.
When will the bubble burst?
The reality is that nobody knows what the future will bring us, and this reminds me of a book I really liked: Blockchain Revolution by Don and Alex Tapscott. It talks about how a lot people were mistaken making predictions about the impact of the internet in our lives, they did not see the bad coming nor the positive predictions became true. He writes:
“if the blockchain is as big and universal like the web, we will be wrong as well if we predict the pros and cons”.
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To wrap it up, how can you protect yourself from an eventual bubble bursting?
- Make sure to study as much as possible about cryptocurrencies and the technology behind it, understand it first before putting your money into crypto. As Lenin said, “knowledge is power”.
- If you decide to invest in projects or start trading forget about USD price, compare to Bitcoin instead. Once you enters crypto, everything goes by the Bitcoin benchmark, and the BTC vs. USD value doesn’t matter much until you actually decide to cash out.
- Cash out your initial investment as soon as you can and reinvest your profits. This is what everyone I follow always recommend.
- Diversify your investments so you can multiply those fractions of BTC you bought. And like my friend told me, cash out only when you need to pay for your expenses.
I know a lot of people don't want this, but even if the price drops to $5,000 I have to say that Bitcoin has been having an amazing 2017!
Here a meme I saw that made me laugh, thanks!
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Sources:
- Coin Market Capitalization www.coinmarketcap.com
- 2017 Bitcoin Corrections from NewsBTC
- From CNN Money Technology article CNNMoney