This is a very confusing topic to speak authoritatively about because absolutely nobody knows where the cryptocurrency market will go. If somebody did, they would not say anything about it and keep the knowledge to themselves for profit! Therefore we must understand the vague understandings of how the market goes up and down.
To be increase in price, there must be decrease in the market
Imagine a digital coin that went up and never down. People invested and experienced return on investment in the same day. It goes up and up, and in a very dreamlike fashion you’re planning out your retirement in a mere year from now.
What’s wrong with this market? It seems too good to be true because it really is! Many experienced traders get quite a bit nervous when a coin skyrockets in value with no dips in price because this is a very standard sign of a “bubble”. A bubble is a term for a price that’s higher than it should be. A bubble occurs when there are not enough dips (or “corrections”) for its increases. This is an older term in the Wall Street investing world. Companies announce a major upcoming release and investors get excited. Everybody throws their money at this stock and the price shoots up. Everybody experiences the thrill of newfound riches. And then some news comes out that (even just a little bit) contradicts the favorable news. Investors panic. They start selling. This creates a wave of sells which causes the price to significantly decrease. The more the price drops, the more people sell to cash out while they still can.
When a coin or stock increases after a decrease, confidence is created for that investment. Confidence is knowing that, “despite a decrease in value, this investment is still likely to go up again.” The more confidence there is in an asset, the less likely people are to sell it off when it starts decreasing.
Therefore, to be a long-term increase, there must be smaller decreases along the way to create confidence. If a coin only went up, then as soon as there was a dip in price, people would think the party is over and sell off like crazy.
Decreases in price are healthy for a cryptocurrency’s long-term future. You absolutely must understand this! If you put a significant portion of money into a cryptocurrency market, you must expect the coin to decrease in value many times during your holding period.
In fact, not only is it healthy for the cryptocurrency, it’s healthy for your mindset. The more you are exposed to decreases (and subsequent increases) in price, the more you know that your long-term strategy is paying off.
Media calls the shots … most of the time
When new investors are holding on to their new Bitcoin or cryptocurrency investment, they’re paying close attention to the news headlines. They’re looking for something to signal an incoming spike or drop in price. Therefore, media headlines in a sense control the price at any given moment. While they don’t necessarily determine the long-term success of a coin, they do control a little bit of the moment-to-moment price. For example, consider a cryptocurrency founder of your choosing is hosting a press release in which he promises big and favorable news. Tens of thousands of investors tune in waiting to see what might cause their investment to succeed. This investor (in this example) instead decides to talk about his new office. He mentions nothing favorable for the long-term success of his coin. This significantly decreases investors’ confidence. Why? The founder promised something amazing, and instead he talks about his new office. If a new office is considered significant and amazing to him, then that offers little faith to those who are holding onto this investment.
The media will undoubtedly pick this up and blow it out of proportion. People who were not tuned into the press release will read the stories of well-written journalists about this founder’s poor management skills, and this will cause shaky hands to cash in their chips (or sell their coins).
Fear, Uncertainty, Doubt (FUD)
FUD comes about in many ways, but mostly it comes around in online communities, forums, and Reddit threads. We are very social creatures and we pay attention to the opinions of those around us. We have this misconception that everybody around us is more educated than we are when it comes to any given investment, so we will heed their words and take into consideration their opinions. When there’s a negative vibe in these online communities, that’s when bands of FUD’ers (a bunch of people who think poorly of a cryptocurrency) will join together and pronounce the death of an investment. These mobs have a very loud voice and speak with authority in their numbers. This causes so many other people without a group of their own to easily sell their investment and look for opportunities elsewhere.
The unfortunate thing is, most of the time, this FUD is unwarranted. It’s based on false news or over-hyped emotions. It’s based on news headlines with little to no credibility. It’s mist on a cloudy day!
Decide Your Position – Short or Long?
In order not to be swayed by public opinion, you must take a stance and decide if you’re playing a short- or long-term game. Are you in it for the long-haul? Then take these media headlines and displays of FUD with a grain of salt. If you’re in it short-term (not wanting to stay in your investment for awhile) then you may be more eager to listen to what the general public has to say. You may be concerned that the coin might dip in price longer than you’re willing to hold it. This is a more … stressful position to be in, because you’ll seldom leave your laptop or phone unattended for more than a couple hours.
This is exactly why I recommend you choose a long-term holding stance in several coins in order to prevent these messages of fear, uncertainty, and doubt to cloud your judgment. You should not be so easily swayed by public opinion and instead look at the outlook of a coin based on its average growth over time because this is perhaps the most reliable piece of data you have. The chances of one single piece of news tanking a cryptocurrency is very slim! So instead look at the broader growth (or if you’re involved in the cryptocurrency exchanges the 1-2 day graphs).
My #1 piece of advice is to take a long or short term position and act accordingly.