When I was a young boy, I quickly learned that grabbing hold of the end of hot poker was not advisable. Welcome to the world of blind speculation.
When speculating, there is nothing wrong in losing a bit of money; it's all part of the game and a lesson learnt is worth its weight in gold.
It's no good crying about the drop in the value of your assets; wipe your eyes, lick your wounds, and learn more about what you are doing. It hurts, but it's not the end of the world.
I do not need to address seasoned investors today because anyone who has been investing for more than a few years will have been through at least one losing period before. However, for many newbies, this is probably the first time they’ve lost on speculative investments, and they will be blaming everyone - except themselves.
If you are one of these people, stop blaming others, take ownership of your mistakes or inexperience and move forward.
Start A Trading Diary
The first thing to do is start a trading diary. Write down how you felt when you bought it and why you bought it. Be harsh on yourself. If you bought because everyone on social media was telling you to buy and you didn't want to miss out, write that down. If you purchased it because a friend told you it was money for nothing, write that down.
Write down when you thought you should get out of your position and why you didn’t and write down how you feel about that decision today. A diary will reveal the amount of emotion involved in your trading and help you control it.
Did you buy for a quick return, or to hold your position for a few years? Do the coins you've kept have a use that you will need, or was it a speculative punt?
Some people would have already learned that speculating in financial markets is not for them, which is fair enough. Still, others will have enjoyed the experience and want to improve their trading abilities.
All new traders get emotional about their trading activities, but the quicker you get on top of your emotions, the better it is. A diary helps you understand some of the errors made and, more importantly, it can help you correct them.
Find a Strategy That Works
The next thing to do is find a trading strategy that works for you. Designing a sound trading system is hard, and it can take years to develop. But a tested trading strategy will ultimately prove invaluable.
I am an old school trader, so the idea of HODL'ing is a strategy doesn't sit well with me. If you bought BTC at $600 or $6,000 and held out until you sold above $60,000, you can justify your HODL'ing stance. However, if you purchased BTC above $60,000, your risk is greatly magnified.
Managing risk is the prime ingredient of profitable investing, and its crucial new investors learn this.
Every trading strategy should have an entry-level, an objective and a level where you will cut your losses. In cryptocurrencies, which have so much volatility, finding a level to place a stop-loss order at is not easy, but without placing an order that will limit your losses, you can lose it all.
Always remember if you limit your losses on one trade, you will still be able to re-enter the market, either in the same product or in another product that might offer a better opportunity.
Beware of FOMO
Over the past few months, I have discussed the frenzied buying of crypto, the outrageous claims coming from various new players, and the need to diversify one's assets beyond cryptocurrencies.
At present, despite many claims made last year, cryptocurrencies do not appear to be a hedge against inflation or economic decline. Still, they do represent a new, improved way of doing business, so, therefore, we cannot ignore them.
I read a lot of crazy forecasts about what specific cryptocurrencies will do this year, much of which has very little supporting evidence, except to look at what has happened over the past 4-years.
The industry may have a very bright future and providing we can get through this year without too much political interference, I remain very optimistic about the sector. But we must be very careful about forecasts of future values.
Here’s a Practical Example
We all know how vital oil is today, and that it is a dwindling resource. 20-years ago, at the end of 2001, you could have bought oil at less than 20 USD.
6-years later, in 2008, the price of oil was at $150, before collapsing back to $32. We then spent a few years trading up around $100 USD before collapsing back to $30. And just 2-years ago, people were giving you money to take oil off their hands. And now it's back up at $80, even though everyone is being encouraged to stop using it.
Oil is still the biggest commodity on the planet. We consume millions of barrels every day, and we can’t make any more. But the value of oil has not continually risen. Oil HODL'ers can point to how they bought in 2001, 2008 or 2020 and made money. But, if you bought oil when it was at $150 and HODL'ed, you would have been losing money every year for the past 15-years.
I used oil as an example as it is tangible, and vastly more important to our lives and economies than cryptocurrencies are today. A few cryptocurrencies may very well prove to be the future of all transactions, but we are not there yet, so trade carefully folks.