In the minds of wary investors, Bitcoin (CRYPTO: BTC) is often grouped with risk-on assets like growth stocks. Under that logic, if there’s a bearish market for stocks, and sentiment causes major players to turn from risk-on to risk-off, Bitcoin is more likely to fall rather than hold steady, just like other assets that are bought for their upside potential rather than their strength.
So does this mean you shouldn’t buy Bitcoin if the stock market is in trouble? Not at all. In fact, you might want to buy even more, so let’s look at why.
The Case for Loading Up When You Get a Discount
To start, let’s look at how Bitcoin performed in the most recent bearish market for stocks in 2022:
As you can see, Bitcoin saw a lot of its value drop in 2022, and then slowly started to rise again over the next year. But those who bought it at the peak during the 2021 bull market took it almost three years to break even. This suggests that it is riskier to buy the coin when prices are struggling, which suggests that it is better to buy it during a downturn.
So, knowing this, why doesn’t everyone do it?
In short, because it’s scary to invest in a cryptocurrency that is volatile in an environment where asset prices are generally trending downwards. Many people, including legendary investors like Warren Buffett, hold on to the false idea that Bitcoin’s value is “not based on anything solid” or that there is no mechanism by which its price can increase without a speculative buying frenzy created by loose monetary policy. When prices have fallen so much recently, it’s very easy for skeptics to look at the short-term movement and conclude that the coin’s value is heading towards zero rather than simply falling temporarily.
But let’s test this view. At the lowest points of its value in 2015, 2019, and 2023, Bitcoin had fallen by about 80% from its previous all-time high. It surpassed new all-time highs within a few years in all of those times. This wouldn’t have happened if there weren’t plenty of buyers willing to invest in it even after its price had fallen so much.
Focusing on the short term is not an activity that pays off with Bitcoin. Focusing on the long term is what makes its investors rich.
The bearish view still looks pretty good
It’s important to recognize that Bitcoin’s value is not destined to increase over any specific period of time. This means that if you buy too much of it during a bearish market, you could end up holding an underwater investment for a very long time, perhaps even a few years, as past data indicates. If you need the money between now and that indeterminate period in the future, you’ll have to sell at a loss, which can be brutal.
If past declines are any indication of what's to come, Bitcoin could be a huge loser in your portfolio, at least for a while. Most investors will sell it long before that to limit their losses, even if they don't need the money to pay for expenses. Of course, history also shows that selling Bitcoin after such a big drop has proven to be a mistake. There's no guarantee that it will be a mistake this time, but the chances are pretty good that it probably will be. So the answer to whether to buy Bitcoin during a downturn in equities is yes, if you're patient, and if you can afford it. But that doesn't mean you should invest a large lump sum. Instead, set up a series of smaller purchases and dollar-cost average over a period of a few months or even longer. Splitting up your purchases will reduce the fear of committing to your position. If the price takes a big drop, you'll continue to buy it and reduce your cost basis, which will reduce the impact of buying it at higher prices. One last thing to note: especially if times remain turbulent, you'll have a much lower chance of holding your coins long term and getting a good return if you're constantly checking the price. Watching the price doesn't change it, so be strategic about how much low-value information you expose yourself to because it can make it very difficult to stay patient.
Follow for Crypto news.
Post a Comment