The Crash We Had to Have
Yeesh. That was unpleasant. Three takeaways from a night crypto won’t soon forget.
Well, it dang gone and happened again. Much like March last year, an insistent correction became a full-blown catastrophe as the crypto world’s addiction to leverage led to the kind of sell-off you’d typically associate with the Zimbabwean dollar.
At 11pm last night, while pretty much every exchange on the planet went down under the strain, the Bitcoin price crashed to US$30k, a correction of 54% from its April highs, before almost instantly rebounding to a slightly more palatable US$37k. Alts, to that point outperforming Bitcoin by a significant margin, were even harder hit, with many dropping 40-50% in a single hour.
Watching it happen in real time was, to put it lightly, stressful. And now here we are in the cold light of day, trying to make sense of what just happened. Here are three takeaways.
#1: Stay away from leverage
Look, we get it. Leverage is exciting. The prospect of catching that big move at 20x or even 100x is mouth-watering. Put in $100, get $10,000 back. But leverage basically exists so that traders on traditional markets (i.e. commodities and foreign exchange) – where a 30% move can take years to play out – have something to make things more interesting while they wait.
Needless to say, that’s not how the crypto markets work. When 30% days in either direction are not just a possibility, but expected, the last thing you need to do is supercharge that risk by making leveraged bets. You want to know why the price touched US$30k last night? Because around 1 million traders lost $10 billion dollars in a cascading wave of liquidations. And that money ain’t ever coming back.
#2: Take a step back
Catastrophic moves are emotional affairs. It’s difficult to watch your personal wealth evaporate before your eyes. You sit there numb while your animal brain screams at you to “DO SOMETHING DAMMIT.”
But the best thing to do is usually nothing. Put the phone down, walk away. Read a book. Any decision you take in the moment will almost certainly be the wrong one – that’s how the markets work. They punish impulse and emotion. It’s what makes you sell at the bottom and buy at the top.
Just remember, a similar crash happened in September 2017, with the price dropping from US$5,000 to US$3,000 in a matter of days. Three months later it touched US$20,000. History won’t necessarily repeat, but the point remains: it’s hard to make good decisions in the heat of battle.
#3: Buy the dip and HODL
There’s nothing fun about wholesale market corrections. But they do happen and in general they’re a normal, healthy part of a trending market. Markets will always, over time, revert to the mean, which in Bitcoin’s case is a remarkably steady uptrend that stretches back to 2013.
Chart courtesy of Scott Melker AKA The Wolf of All Streets
The violence of last night’s meltdown was obviously unexpected, but the strength of the run-up from December to April was similarly extravagant. Balance had to be restored.
But as the old saying goes, be greedy when others are fearful and fearful when others are greedy. Or as crypto likes to put it: buy the f___ing dip.
This may be the end, or it may be the half-time break before things really get moving. But let’s be honest: two weeks ago most of us would have killed for the chance to buy Bitcoin at this price. Are we really giving up so easily?
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Luke from CoinJar
*CoinJar requires Identity Verification to be completed prior to any crypto purchase. In a small number of cases we might have to request additional identity verification information, in adherence with national law.
^As of 26th of April 2021. This excludes any additional fees that you may be charged by your bank or credit card provider.
Like many investments, cryptoassets carry risk. Given the potential price volatility which can be extreme, the value of your cryptoassets may fall rapidly or over time. Cryptoassets are also currently unregulated by the FCA and you are unable to access the Financial Services Compensation Scheme or the Financial Ombudsman Service.