Bitcoin has suffered a dramatic drop, of the order of 75% from its highs of USD 69,000 in November last year to USD 17,567 this past Saturday.
The first thing to say is that The false idea that cryptocurrencies work as an inflation hedge is over forever. With the highest inflation of the last 40 years in the US, bitcoin accumulates a fall of 56% in this 2022 while gold accumulates a rise of 2%.
But the most important thing is that the entire cryptocurrency market is in a clear downtrend. But it is not something typical of cryptos: the stock market is having one of the worst years and is also in a downtrend.
So, does bitcoin behave like another financial asset? The answer is yes, especially in times of crisis. It is enough to see how cryptocurrencies and stocks have moved in March 2020 (beginning of the pandemic), the Evergrande disaster, the appearance of Omicron and the recent rise in interest rates and inflation.
By raising the interest rate, investors have no incentive to look for risky assets. An asset with the volatility of bitcoin will never be able to be a refuge. That quality applies only to gold.
The importance of following trends
It is full of gurus who forecast bitcoin prices. There is something for everyone: USD 100,000, USD 300,000, USD 5,000. But the reality is that it makes no sense to discuss whether something is cheap or expensive, it has no relevance.
The important thing is to be able to follow trends and always protect capital. That is the main rule to be able to survive in the markets, be it cryptocurrencies, stocks, commodities or whatever.
There are different techniques to identify trends, moving averages being one of the simplest. And what tells us a trend? It simply guides us in the future about what can happen. It is just a probabilistic indication.
Then what do I do? Do I buy or sell? There is no magic answer. But given the downtrend, this is not the time to buy because the odds are against it. In fact, the best thing to do at this point would be to bet on the continuation of the decline in crypto, although it is not that simple to implement (it can be done with futures that trade on the Chicago Mercantile Exchange).
If you are buying and the trend is down (as it is now), you have to define a maximum loss. If the price of bitcoin (or any asset) reaches the number that equals your maximum loss, you have to sell. No turns. Above all, defend capital.
Imagine not having applied stop loss in bitcoin or the rest of the cryptocurrencies. They would be with losses between 70% and 95%. Makes sense? Absolutely not. How much money lost is enough for you to get out of the position? It is simply a survival mechanism.
Why normally nobody wants to sell when they are losing? Because we are left with the hope that he can recover at some point. The flip side is that, although the possibility of holding and recovering exists, the decision to hold also puts the entire initial investment at risk since the loss is not limited.
This weekend, bitcoin broke below $20,000 which is a relevant support level. Even with the recovery he had, the chances of seeing an acceleration in the fall are very high. And when an asset starts to fall sharply, most people freeze. That is why you have to have a previously defined plan.
It is often said that bitcoin has already fallen many times and that it has always returned to exceed the historical highs, so it will repeat itself. But to think that is a very risky reasoning. Just because that happened doesn’t mean it will happen again. It is a logical inference error that many people make.
Furthermore, we cannot forget the enormous injection of liquidity from the Federal Reserve, which allowed all markets to act in bubble mode. Just look at the following data: the total cryptocurrency market capitalization is at USD 0.87 Trillion, after having reached USD 3 Trillion a few months ago.
So when should I buy? When the trend turns up again, as it did in late 2020 or mid-2021. And when should I sell? When the trend is down, as it has been for several months.
To finish, I would like to invite you to download for free a report that I prepared with a list of companies with potential and a good risk/return ratio, in this context of high inflation. Do it in the following link.