Why I'm Keeping My Bitcoin Despite The Crash

Image: iStock

Early this year, I decided to set up a cryptocurrency investment portfolio, using money I could afford to lose. Since then, the total value of my portfolio has fallen by 60 per cent. Here's why I'm holding on - and why you might want to consider buying bitcoin while prices are cheap. (Emphasis on 'might'.)

There are lots of analyses that start with the phrase "There are two types of people in the world..." Anyone vaguely interested in the cryptocurrency markets would know that there are those that are fierce defenders of these new ways to store value and conduct financial transactions and others who see it all as fool's gold and a get rich scheme that's doomed to fail.

At the moment, it looks like the sceptics have got it right. Since the heady days of the week before last Christmas, when Bitcoin was trading at over US$19,500, the price has steadily fallen all year to around US$3700.

Bitcoin Is In Meltdown (Again)

Bitcoin's price dropped sharply overnight, twice falling below $5000 per coin. At 6.30am AEDT, the benchmark cryptocurrency was trading lower by around 11.5% at $US4990. The collapse is being described by analysts as "like a house of cards." Yikes. Here are the details.

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Bitcoin isn't the only crypto-coin that can be traded. And, while its value shouldn't, theoretically, impact the value of other coins, Bitcoin tends to lead the entire market up and down. So, while there have been coins that have appreciated in value while Bitcoin has fallen, the majority of crypto-coins have followed the same pattern as Bitcoin.

But what's behind this fall, and could the market recover? Let's take a look at some facts.

A Brief History Of Bitcoin

From 2016 though to the early part of 2017, Bitcoin's value steadily rose from around $400 to about $1000. For any trader, that represented a a solid gain. While there wasn't a spectacular leap in value - that was yet to come - it made Bitcoin look like a reasonable investment.

By the middle of 2017 things changed. A combination of increased press coverage, an influx of new traders - not all operating on the right side of the law - and the emergence of many new crypto-currency exchanges created an environment where there were more traders with more places to conduct transactions. Many people, looking to enter the market while it was still relatively new plunged lots of money into Bitcoin and other coins.

By September 2017, the price has quadrupled, exceeding US$4000 and we were at the base of an exponential curve which saw the price almost reach US$20,000 before Christmas.

Image: CoinMarketCap

Unsurprisingly, the price didn't stay at that level for very long. The Bitcoin bubble burst with the price dropping by two-thirds in fewer than seven weeks. And while there have been a couple of sojourns with the price rising to above US$11,000, it has been on a downward trajectory for most of 2018. But over the last couple of weeks, the price has fallen off a cliff from about US$6400, to under US$4000.

Interestingly, this isn't the first time the value of Bitcoin has crashed. This chart shows that that this is the fourth time the price of bitcoin has plummeted by in excess of 80% before recovering.

What Happened In 2018?

Over 2018, a number of significant events occurred that impacted the trading of cryptocurrencies.

In Japan, a significant case involving a hack on a major cryptocurrency exchange resulted in over AU$500M in compensation being paid and increased scrutiny and regulation on exchanges in that country. That hack, and others such as the Mt Gox attack in 2014 and an attack Bithumb this year have eroded confidence in cryptocurrency markets.

While local exchanges have escaped such attacks new laws for digital currency exchange providers operating in Australia were implemented by AUSTRAC. Those laws mean exchanges must register with AUSTRAC and meet the Government’s anti money laundering and counter-terrorism funding compliance and reporting obligations. Suddenly, things became a little more difficult for those working beyond the fringes of the law.

That type of regulation is appearing across the world.

The introduction of tighter regulation has also made the market more attractive to institutional investors and they are, typically, more conservative in their investor approach than short-term traders. That's led to a change in the nature of trading activity. It also means that coins need to prove that they are more than just vehicles for holding value. They need, like shares, to show some value. For example, while Bitcoin may be a reasonable holder of value, XRP is working with banks to provide an alternative to US dollars as a tool for shifting money from one currency to another.

That combination of a loss of confidence in the market as a result of hacks, the increased difficulty for traders trying to use cryptocurrencies to either hide money or conduct illegal transactions and influx of institutional investors has changed the nature of the Bitcoin and other coin markets.

In other words, 2018 has been the year where the hype met reality.

What If You're Holding Bitcoin Today?

Early this year, I decided to place a small amount of money in a cryptocurrency trading account with Coinspot. That $1500 account was spread across a number of different coins that I've occasionally changed. At the moment I'm holding BTC, XRP, STR, ETN, LTC, ADA, BCHABC and BCHSV.

My total portfolio value is $558.55 - a loss of $941.45.

My plan is to hang on for now. I'm not a financial adviser and I'm not advising anyone else on what to do. I approached cryptocurrency trading as an experiment and I was prepared to lose all the money I tipped into the account. If the market heads back to the levels of last December, I'd probably collect the gains and bail out. But for now, I'm holding on.

The question of what to do will depend on what price you bought in at, whether you think the market will recover and how exposed you are. There's a lot of "expert" advice around but the reality is that the bitcoin market is still very new and no-one really knows what's going to happen. Many analysts agree that nascent markets are volatile and what we're seeing is to be expected.

Should You Buy In Now?

The temptation, when prices are low, is to use this as an opportunity to either expand your holding or enter the market. Certainly, many people has amassed significant fortunes by buying into markets during market crashes. But we really don't know whether Bitcoin is in a death spiral that ends when the value hits zero or if this is a fall that will precede a new rally where the value appreciates. And so-called experts are divided. I've seen predictions suggesting bitcoin could reach US$100,000 or plummet to nothing.

If I was planning to buy some more Bitcoin, I'd only be using money I wasn't depending on. If it was all lost, I'd be annoyed but not devastated. I'd buy in and forget about it for a while. Back when I first purchased some coins, I checked the value regularly and saw the price increase and decrease almost every minute. Now, I look at it as often as I look at my superannuation - maybe every month or so.

Given the speculative and volatile nature of cryptocurrency markets, it's tough to give any definitive advice. My feeling is that a small holding is a good way to ensure that, if the market does go crazy again, you can make a few bucks. If my $1500 seed turned into a $10,000 tree I'd be pretty happy and would probably cash-out. That's enough money for a nice family holiday.

The increased interest by regulators is a good thing in my view and means you can feel a little more confident that your money won't disappear like it did for early investors in Prodeum, who found their US$11M gone and the website wiped other than the word "penis".

Market crashes aren't new. We've seen them hit the stockmarket many times and, each time, the market has not only recovered but exceeded previous levels. But cryptocurrencies are different. We don't have three hundred years or so of history to look back on. And cryptocurrencies are not the same as shares.

A share in a company represents a piece of something that creates value. Most cryptocurrencies are tools for holding, not creating, value. And that's important to consider. When you invest in a mining company, for example, you can look at what mines it operates, read about contracts and deals, check an annual report for financial performance and make an informed decision.

You can't do that with many cryptocurrencies. There's no annual report for Bitcoin and no easy way to know how it's being used to create greater value for its holders. And perhaps that explains why the value is currently falling.


Comments

    why you might want to consider buying bitcoin while prices are cheap.

    That's the problem - is it cheap now? How do you assess the value of cryptocurrency?

    I think this is a good article on the recent fall in price and the danger of trying to work out reasons after the fact:

    https://rogermontgomery.com/bitcoin-takes-a-plunge/

    There is no point holding onto it. Atleast 12 months ago i had done extensive studies of bitcoin and deemed it a buy once price has fallen all the way to 1200. So there is quite the tumble still to come IMO (over a decade of successful trading). So if i was unwise enough to be in a bitcoin position at the moment, i would be dumping it. Sitting on my hands, and waiting. Just when the entire world has given up on bitcoin, and it's considered complete rubbish, that will be it's bottom. It may even dip just under 1000 before any solid footing is found. But i am going to buy at 1200 and below. Everyone is already screwed by then, so it's the best time to get in when that happens :) Good luck to all i hope you trade well. To people who sold your houses to buy bitcoin, sorry, but you are going to get wiped out if you sell when it's time for the market to panic, your only hope is to hold. It will come back. Just have to stomach the fact that all your wealth will be devalued to almost nothing, but not lost.

      But if he bought high, he might as well just hold on. He did say it was money he could afford to lose, so he should not sell until he has made a profit, which could be never.

        People say that it's money they can afford to lose when its not a large part of their assets and they are willing to accept high risk in the expectation of high rewards. If the expectation of high rewards is gone it is akin to throwing money out the window.

        Antony, however also has some expectation that the high rewards are still possible, with hopes that his $1500 may still become $10,000, but has also said if he managed to get his $1500 back he would head for the exits. So his risk reward has gone from $1500 begets $10,000 to maybe $750 (I am guessing here) gets him $1,500. So his risk/reward has changed mightyly. However, he has said he is not investing but merely speculating so maybe you are correct, he should just let the dice roll ...

    bitcoin fans will never comprehend the fact that the actual format used for a currency (paper, coin, plastic, gold, blockchain) is completely separate to how an economy is run and functions.

    While blockchain could easily perform the same functions that paper, coin, plastic etc. currently perform it's managing of that overall economy where bitcoin fails. An economy needs regulation, it needs government oversight, taxes need to be taken and a government needs a way to force you to pay taxes. Also a functional economy has a federal reserve setting monetary policy, while banks are enforcing regulations to help stop fraud, crimes, tax evasion etc.

    Whether you use notes, coins or blockchain to track your wealth is irrelevant. It's about how the economy runs and how it is managed and protected from massive crashes and insane booms. Without the government being able to control the supply, regulate how it is used, tax everyone fairly etc. an economy would not work. So it's not so much that bitcoin is over complicated and provides one positive for every dozen negatives. The problem is that bitcoin bros think it can just replace an entire economic system. When the truth is, it would really just be replacing one small component in the entire system but because of the way it is built (no central control, limited supply etc) it can't actually even function as a currency within an economic system.

    Blockchain itself may find uses in B2B systems down the line. But Bitcoin is pure fantasy.

      Yes - and one pf the problems is that for many people blockchain=bitcoin. FWIW - I think blockchain is a useful tech but its applications are limited to specific use-cases. And, as I've seen transnational volumes and velocities increase, I'm not even convinced it's a long term solution for cryptocurrencies.

      But that's a discussion for another day.

    The thing that stands out the most in this article, "Most cryptocurrencies are tools for holding, not creating, value.". If that were the case, why are so many people 'investing' in it. It may have been the intended purpose but I doubt it. Fiat currencies are managed and supported by governments who try to keep them relatively stable. They also make sure there is enough of a supply for people to hold and use for their daily activities. The cryptos all have a fairly limited supply, until someone creates the next one. It is fairly obvious that if a cryptocurrency becomes successful it's exchange rate will increase. This attracts speculators, creates hoarding and undermines its usefulness for trading goods. I am not an economist, or any expert on currencies but it's pretty transparent that without anybody trying to maintain stability it is subject to speculation and manipulation. It is almost inevitable and hard to think that isn't the intention, maybe not the original Bitcoin but certainly the new ICO's.

    If you are trying to put a serious value on what any of these coins are worth, first thing to consider is who actually has no alternative and really needs it. You can make the same argument for fiat currencies, we can go back to bartering goods and services, and that is exactly what happens when people lose confidence in their own currency, when times are tough. But with a crypto doesn't even need tough times. That's without even considering all the other problems it faces.

      I don't think the people are investing - I think they are speculating (gambling is another word some people use). The only place where I used the word "invest" was in the intro when I mentioned it was part of my investment portfolio. But otherwise, I prefer to use the word "traders" rather than investors.

        I agree it is purely speculation of late (although it was promoted as a way of avoiding governments and law enforcement).

        In your defense, people jokingly refer to 'investing' in lottery tickets, and people do put money into stocks that they know is speculation and but refer to as an investment. However, if you know it's speculation maybe you shouldn't have it in your 'investment portfolio', at least not tell people that if you don't believe it.

        Those that invested this time last year were most certainly gambling on its continued rise. Those that invested earlier, not so much.

        Someone that invested 2 years ago is still something like 500% ahead, something a lot of people forget. I have friends in both camps and the ones that invested later are most definitely the bigger gamblers with the typical get rich quick mentality.

        The earlier ones are looking long term - some got in at $100 by the way so are looking REAL pretty. One or two of them sold a few coins near the peak, which easily covered their investment, but still kept some. They still believe in its long term viability, but are at a point now where they cant lose.

        Its an easy belief when you've already made a profit, and not its just a matter of how much.

    I think the difference with this one was that there was global attention on Bitcoin. If it was ever going to be a functioning currency, this was it. It turns out, it's not that great as a currency.

    Ripple is a solution to cross-border transfers for banks, and one that many banks are getting behind. Obviously, it doesn't matter if it increases in value or not for this purpose.

    So what does Bitcoin offer? Cheap, instant transactions? Nope. Privacy and anonymity? Not really (compared to Monero, for example). Brand recognition? Yes, but now it's trashed.

    I have a transaction account with ING with lots of perks and no fees. If they start offering almost-free instant international transactions using Ripple, why would I want to bother with Bitcoin? Governments certainly won't be giving up control of their currencies either.

    So then you're left with Bitcoin as an investment. The problem here is that if everyone loses interest in it, it's worth nothing. And that appears to be what's happening here.

      So what does Bitcoin offer? It offers an asset with currency like properties that have no Government oversight.

      People strangely think that's a good thing.

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