Good morning everyone,

 

I am writing this on Sunday 18/4/21; I just got up and noticed a huge movement in the price of Bitcoin, and consequently on most of the other cryptocurrencies that happened just after 4am GMT. 

 

Let's reflect on what happened and try to understand it before our minds gets poisoned by the inevitable news you will read online as you wake up.

 

First of all, it's important to understand that the Crypto market never sleeps;  24 hours a day, 7 days a week, 365 days per year. This latest movement is proof of it, as it happened in the early hours of Sunday morning.

 

Why did it happen? The truth is, nobody knows why these short term movements happen, but we can all learn to understand the mechanics and make sense of it without getting emotionally involved (not easy to do if you invest in Cryptocurrencies). You will probably read plenty of articles, that will tell you (after it happened) that they knew all along it would happen, and pinpoint exactly one event that triggered it. Please ignore them! It would be great if they could tell you about these events before they happen, but they never do.

 

The truth is that movements in price of 20%, 30%, 40% are common in cryptocurrencies, and if you are not able to zoom out and HODL without becoming an emotional wreck, perhaps you should not invest in this space. What technically happens, is that many short term traders bet on the price of Bitcoin to go in a certain direction, and use borrowed money to leverage their bets (let's use Bitcoin in this example, but this applies to other cryptocurrencies as well); often, to protect their account against a movement in price in the opposite direction of their bet, they place what is called a Stop-Loss Order, which automatically triggers when the price reaches a certain level. On top of that, traders that did not place Stop-Loss Orders but have a highly leveraged accounts may get their account liquidated when the price goes against them and they do not have enough money in their account to cover their losses.

 

Let's look at the following chart, where each candle represents one hour in time:

 

A lot of Bitcoin short term Bulls (traders who bet on the price of Bitcoin to go up) would have put stop loss orders under either the blue or the orange line in the chart (depending on how aggressive they are). What happens when the price reaches the stop loss orders is that these automatically became sell orders that get placed automatically at market price (and that means any price  where you find a buyer willing to fulfill the order). In periods where the volume is not high (like in this case), this means a really violent price move that can literally wipe billions off the Bitcoin marketcap in a matter of minutes. 

 

What should you do? Well, that completely depends on you, the structure of your portfolio and your investment strategy, but I always like to zoom out and look at it from a larger time frame perspective to see were the price move fits in the bigger scheme of things. 

 

Let's look at this next chart, where each candle represents one day:

Based on this longer time frame, we can see that there is no need to panic, as the price movement we just experienced perfectly fits into the consolidation phase that comes after reaching a new ATH (All Time High); as you can see from this latest chart, the price just tested the first resistance line on the daily chart (the yellow line on the chart above) and then bounced off just as strongly. The price went down from $59,000 to $51,000 and we have now climbed back to $56,000. 

 

So what can we learn from this? This will also depends from your investment style, but below I have listed some of the lessons I have learnt along the way: 

 

1) Please, please, please, unless you are  a very experienced trader, DO NOT trade crypto on margin (that means leveraging your trades) and DO NOT trade with borrowed money. 

2) When in doubt, ZOOM OUT! Have a look at the price movement from a long term perspective. Is it just a price correction or is the market turning?

3) To avoid worrying about these "speed bumps" (as they will appear from a long term perspective), and get on with your life without being glued to the charts, invest for the medium to long term and "Hodl" through these violent price swings.

 

Please let me know your thoughts in the comments below, and let's start a conversation. 

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