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Bitcoin is a disruptive technology. Nobody said seperating money and state would be smooth sailing. We share some advice on how to embrace the volatility and enjoy the journey
Hi friends,
We hope you’re enjoying a peaceful weekend after what was yet another ‘eventful’ week.
Nothing changed in regard to Bitcoin of course. It still just keeps doing its thing, processing your transactions and adding new blocks every ten minutes.
But you could argue it was an ‘eventful’ week (with a small ‘e’) when it comes to Bitcoin’s price. We recently saw a small but not insignificant dip of around 25% from just under $70,000 per coin to just below $50,000 before the price quickly recovered to over $60K by the end of the week.
Whilst this kind of volatility is nothing new in Bitcoin, for newcomers who haven’t experienced it before, we understand it can leave a certain feeling in the pit of your stomach.
If you’ve recently started allocating significant chunks of your wealth into Bitcoin, then it can be painful to see it drop in purchasing power by 25% in under 48 hours. Feeling a spike of adrenaline when you see big red candles on a price chart is a completely normal response and it isn’t helped by all the noise that erupts on social media.
And we know you’ve already seen the endless memes telling you to ‘Hodl’ and ‘Buy the Dip’. Whilst some of them are pretty amusing, they probably don’t help much if the price volatility is causing you some stress.
So, this week we thought we would try and arm you with some good advice on how to handle Bitcoin’s volatility and perhaps even learn to embrace it!
The first thing to remember is that Bitcoin is an emergent and extremely disruptive technology that is still only 15 years old.
Consider that it took mobile phones almost 30 years to reach full market penetration and mobile phone technology was only disrupting traditional telecoms. It wasn’t threatening incumbents with anywhere near the power and influence of central banks.
To think that the transition from centrally managed currencies to a new decentralised monetary standard would be smooth would be naïve. Bitcoin can solve a lot of problems with our current financial system, but it isn’t a magic wand that can create a rational global economy overnight.
The vast majority of the population have not yet fully understood Bitcoin. Even a lot of people who own some still see it as a speculative bet and are just trying to gamble with it to accrue more dollars.
Trying to acquire more of a failing currency by speculating on a superior currency is of course illogical as we explained in a previous article. The reality is however, that these people still represent most of the ‘market’.
Market participants like this do not behave rationally. When panic spreads across traditional financial markets, instead of correctly seeing Bitcoin as a flight to safety they instead flee back to dollars. They even dump their Bitcoin to this end as well. This type of shortsightedness will no doubt cost them in the long run.
The market is likely to continue to act irrationally for some time to come until a larger percentage of the global population has come to understand Bitcoin properly in the way that you have.
In the meantime, us rational participants need to learn to embrace the volatility.
You’d be right to assume that we aren’t the biggest fans of Keynesian economics. So, it does pain us slightly to quote its founding father John Maynard Keynes.
On this occasion however he makes a very good point, and a true statement is a true statement regardless of who said it.
The point Keynes so eloquently makes is that markets can often persist in behaving irrationally for a very long time before participants become more informed. And as we described earlier, most of the participants in the Bitcoin market are still acting irrationally.
And this is why it is so important for you to remain solvent as you seek to grow your Bitcoin stack. In an irrational and volatile market if you try to get too clever or greedy then there’s a good chance you’re going to trip yourself up.
Despite what the next ‘Bitcoin Influenza’ might promote to you as an incredible way to grow your Bitcoin faster, please understand that almost every suggestion will include employing some sort of leverage.
Bad idea! You just introduced counterparty risk and let an exchange use your money for speculative gambling. There is a strong likelihood of total loss. For real world examples look at what happened to BlockFi and Celsius.
Bad idea! Bitcoin is volatile, and if it drops 40% in price then your loan provider is going to come demanding you deposit more collateral in what’s known as a ‘margin call’. Tapped out and can’t provide more collateral? Well, wave goodbye to your Bitcoin.
The point is, if you use Bitcoin as a tool for gambling and speculation, then you’re likely to have a rough time.
Instead recognise Bitcoin for what it truly is; sound money that acts as an effective way to save your purchasing power for later consumption. Goods and services naturally depreciate against sound money and that means any purchasing power you do store will increase over time.
Don’t overthink it. Our constant desire to speculate is simply a hangover from a fiat system that forced you to speculate simply to outpace the debasement of your currency. Bitcoin solved the debasement problem, so set yourself free from the addictive need to speculate. The only way to win at the casino is to leave.
This is what it really means to “Stack sats and Stay humble”.
Another good thing to bear in mind when the value of Bitcoin is volatile to the downside, is that this is the exception to the norm.
This is not an opinion. It is a plain fact demonstrated in Bitcoin’s appreciation vs the Dollar over the past 10 years.
Yes, Bitcoin when measured in dollars is volatile. But when you zoom out you realise that the volatility is almost exclusively to the upside. This is why it pays dividends to apply some perspective and extend your time horizon. If you focuson short term price action, there’s a risk you lose sight of the bigger picture.
Similarly, it also makes sense to apply a longer time horizon when looking at the value of the US Dollar. At face value the dollar appears quite stable, which helps explain why people flee to it when they are seeking safety. But is it really that stable and safe?
The US Dollar has lost over 97% of its value over the past ~100 years.
And the circulating supply of the US Dollar is anything buy stable. Which helps explain why its value has plummeted so much:
So, the obvious question might be. Do you prefer volatility to the upside or to the downside? The US Dollar does not offer any protection over your purchasing power. All it does do is guarantee that it steadily declines. And in the not-so-distant future that steady decline could very well turn into rapid one.
Hopefully, armed with this knowledge, the principles we can adopt to avoid being shellshocked by Bitcoin’s volatility are actually quite simple and actionable:
1) Expect Bitcoin's volatility, it is inevitable
2) Stay Solvent. Bitcoin is for savgings, not for gambling
3) Bitcoin's upward volatility is preferable to the US Dollar's steady decline
Armed with just these principles you should be able to embrace Bitcoin’s volatility, or at the very least, understand it and make sense of it. This will make it so much easier to drown out the noise and disregard the incessant ‘Bitcoin influenza’ theories for Bitcoin’s most recent price action.
Eventually all of these short-term events become nothing more than a footnote in Bitcoin’s journey. We saw the price dump when Mt Gox got hacked, and again when China ‘banned’ it. There have been endless global events that have made Bitcoin’s price drop, but each of those events are now barely recognisable as little blips on the chart. Understand that whatever is causing volatility now will soon pass as well.
And we wanted to add one more final principle to follow:
4) Stop checking the Bitcoin price chart
You don’t need to ‘actively manage’ your Bitcoin savings account, you can simply add to your pot over time and watch it grow. Most people really struggle with this, probably because as humans we often mistake complexity for quality, and this approach seems almost too simplistic. The truth is, it takes a lot of homework and understanding to arrive at the rather simple conclusion that you can simply save for your future in Bitcoin, relax, and enjoy life.
The less time you spend on Bitcoin price charts the better. Most exchanges use similar design techniques as modern casinos. See all those flashing green and red lights on the screen? Yeah, these interfaces are designed specifically to hold your attention, increase your adrenaline and make you want to gamble. Not only does this increase the risk of you making poor decisions and losing your Bitcoin it also does something even more insidious. It robs you of something even more finite and precious. It robs you of your time.
The overriding message this week is to adjust your time preference and start applying reasonable time frames to your plans for building wealth. It’s preferable to getting blown around by short term price action like a carrier bag in the wind.
But we must also bear in mind that holding Bitcoin for the long term can only be successfully achieved by holding it in secure self-custody. The list of exchanges that have collapsed over the years is long and still growing, so you can’t rely on a custodian.
When it’s time for you to start building generational wealth we are here to help. We will:
1) Ensure your self-custody meets industry best standards using only open-source and verifiable hardware and software.
2) Secure your online privacy across all of your family’s devices and prevent you from being tracked and spied upon.
3) Help you secure Plan B Residency in Bitcoin friendly jurisdictions to give your family options.
And of course, as technology evolves over time we stay beside our clients for the long-term and keep everything you do up to date with industry best practice.
So, if you’re ready for the long haul and you want to ensure a safe and peaceful journey toward financial freedom then book a free consultation call and let’s get you prepared properly.
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