Everybody knows Bitcoin is a volatile investment, or if you don’t, you should. It’s a completely new technology and it’s growing and an unprecedented rate. The old hands are seasoned navigators of these turbulent waters with nerves of steel and giant cojones. Newer investors, especially those coming on board in the last few months have seen huge rises but only minor falls. If you’re new to the market, or even part of the old guard there’s a few things you need to learn.
It’s a wild ride
Like most investments Bitcoin will fluctuate, but as it is a unique investment proposition it is more volatile than any of the investable asset classes. This means the shifts are often quicker and more extreme. Dips happen for a number of reasons, lack of buyers, large sell orders, bad news, loss of confidence, increasing fees, slow transaction speeds, amongst many others. Whilst some should cause genuine concern, many are just staple uncertainties within the market.
The dips are often made worse by Stop-Losses, these are auto-selling devices used by Bitcoin traders to limit their positions and take profits (or stop losses) at a certain level, when these are triggered the prices can drop dramatically. These are made worse by panic sellers, people who see these events as ‘the bubble popping’ hoping to get their capital or profit ‘cashed in.’ Some of these ‘sells’ are people looking to encourage a downtrend, hoping to leverage their profits to buy back in at a lower amount, increasing their holdings.
Hold the Door
Many people entering the market of late will not quite understand the volatility of this asset and may pull the selling trigger, and that could be a poor decision. If you have faith in the technology and its value, you need to keep your hand strong and stay the course.
In the community, it’s simply called holding or ‘Hodling’ on Reddit. The market will always be driven by the investors and its stakeholders. Trading Bitcoin is a risky business and many fingers have been burnt with people often selling low and buying high, the wrong way to make a profit.
The simplest strategy for Bitcoin in recent years is to hold your nerve and hold your Bitcoin, set your targets and sell when you’re ready. Only ‘Cash-out’ when you want to.
The Wolves are coming
Bitcoin is a unique investment in a number of ways, a major one is that it was available to the public prior to any of the financial institutions or trading houses. For the first time in history Joe Bloggs was able to tread where JP Morgan could not, and they’ve been spitting feathers about it.
Unfortunately, that time is coming to an end. Wall Street will begin trading in Bitcoin futures on the 10th of December and it could produce levels of uncertainty never before seen in Bitcoin. The futures will allow these bankers to ‘short’ the value of Bitcoin, making a bet that it’s price will fall, and they won’t have to ever buy a single Bitcoin.
Large short positions will likely be broadcast through media, hoping that this new class of tech investors lose their nerve, panic sell and cause huge drops. The way down is often quicker than the way up, and they will be able to make profits from scare tactics and weak hands.
These bankers do not care about the principal’s, the technology, or the algorithms Bitcoin is based on, they just want to make money.
However, it may not be that easy. Bitcoin has crashed before and many have underestimated the power of the HODL.
What are Futures
Futures are a way for trading houses and investors to bet on the prices movements in assets without ever requiring to own the assets. It may seem complicated but it’s rather simple.
I open a contract to ‘buy’ (make a bet) that 100KG of Steel will be worth $100 on January the 1st. At that date, I must pay $100 for that ‘steel’ but I will never receive it because a trading house doesn’t really want steel, so it will be cash settled (paid in cash).
If that 100KG of steel is worth $110 at 1st of January, I’ve made a profit of $10 as I’ve bought that Steel below market price. If it’s worth $90 then I’ve lost $10.
So what does that mean for Bitcoin? I here you ask.
It is possible that Investment Banks will take large short positions seeking to drive the price down. They will not be allowed to dump bitcoins to drive down the price artificially, but if stories and FUD (Fear, Uncertainty and Doubt) spread through the media then they could seek to trigger a panic sell by other means.
Wall Street has no bounds, no ethics and Bitcoin holders may be subject to the strongest market forces they will ever feel.
Wall Street and futures take Bitcoin from the investment shadows and into the burning attention of the wolves. Get your pitchfork out and protect those flocks.