‘In the wake of the massive crash in the price of Bitcoin, many people are contemplating the big question: should they put their money into Bitcoin? This is a difficult decision for many reasons. There is social pressure around it, there is a massive loss aversion, and the price is being pushed
down by sellers right now. Understanding all of these reasons can help you get a better long-term perspective, and then you need to come to terms with the fact that the price could go down quite a bit before it comes back to the highs of December 2017.
Social Pressure on Bitcoin
It seems like everywhere you go, someone is asking whether you own Bitcoin, what Bitcoin exchange you use, and then pushing their opinion on you. Bitcoin has become the new politics or religion. It creates heated arguments because of its connection to one’s belief system about the strength of the economy, libertarianism, and the free market. People have always gotten emotional with their money, but it seems to be even more
pronounced in the case of Bitcoin. Knowing this, you should be aware of the herd mentality that guides the Bitcoin price. You are going to experience this when you speak to anyone about Bitcoin. They will talk about how much it has gone down, say something about how it is clearly
a scam, and put pressure on you to agree. By immunizing yourself to this social pressure, you can evaluate Bitcoin as an investment rather
than as a signal of your intelligence to other investors and people in your life. In the end, nobody knows anything for sure, and you would do best to trust your instincts and independent research.
Loss Aversion Prevents You from Getting Gains
Notable investment gains can only be had if you take the risk and invest your money. It may sound simple, but people seem to forget this sometimes. The longer your money is on the side, the lower your returns are going to be.
So, if you’ve watched the drop in the price of Bitcoin and are too afraid to put your money into
it, that’s fine, but this means you won’t be making any returns with that money. Another way to look at it – Bitcoin is a naturally risky investment. The price has dropped a lot in the last few months, but the original thesis about it becoming a world currency is still possible.
If the thesis still holds, then the price of Bitcoin shouldn’t matter, only your risk tolerance should. Prices dropping don’t affect the risk of an investment, volatility does. In the end, the only thing that should affect your decision whether or not to invest in Bitcoin is the volatility.
Otherwise, you are just letting the loss aversion that results from watching the price rapidly drop prevent you from getting gains.
Price Drops Are Fueled by Selloffs
Another seemingly simple intuition is about the herd mentality of traders. Everyone is looking at the price of Bitcoin dropping and trying to get out before it drops any further. The perpetual effect that results from this has to find a bottom, but no one knows how far down that will go.
There are certain price levels that act as floors to investments, because that is where the traders originally bought in. If the price goes back down to that level, it acts as a support, since the traders are willing to buy even more at that price.
Say a trader bought Bitcoin at $5,000, held it all the way to its peak and back down, and then saw the price coming back towards $5,000. What would they do? They would sell if it was above $5,000 just to lock in profits. But if the price got back down towards where they bought
it, they would probably hold, or even buy more. Knowing that sell-offs are fueled by the desire to lock-in profits and avoid losses, you must know that the price can go down for a long while yet. This possibility shouldn’t scare you off from investing in Bitcoin but should be something you factor into your investment analysis. A short-term investment in Bitcoin is unlikely to yield high, or even positive, returns. Only by looking past the sell-off into the long-term can you project any possibility of making good money. But to do so, you must accept that the price is likely going to go lower too.
The three factors outlined above are more psychological investment factors than a fundamental analysis of Bitcoin. To decide if you think Bitcoin has any long-term potential, you must evaluate its competition. This means looking both at other cryptocurrencies and at the fiat
currencies Bitcoin is aiming to replace. The overarching goal of Bitcoin is to improve the current monetary system to a point where it is far more effective than anything we have ever seen before. This is possible, but it means disrupting large parts of our economy, and the big worry is that regulation will come in and prevent it from becoming a reality. That is the largest bear case against Bitcoin. So once you decide whether you think Bitcoin has long-term potential, you need to look at all the social factors surrounding it. First, there will be a generally bearish attitude presented in the outside world and you must be ready for that. Then, there is the fact that humans are naturally loss-averse and won’t want to stomach the volatility over the next few years. Finally, you must deal with the herd mentality of sell-offs and the likelihood the prices could continue to drop for
a while longer. But the best advice on whether you should buy Bitcoin can be given by no one but yourself. Remember that it’s you who will take all the profits as well as losses.’