Our cryptocurrency world is filled with bright lights of changing prices and rapid-fire predictions. If we’re being frank, it’s chock full of a ton of hot air. For many, Bitcoin’s ups and downs continue to set the mood, heavy with concern and doubt across the altcoin’s market. As an avid financial writer for OverTraders.com, I believe most investors make a huge error. They’re missing the big picture and they’re risking Bitcoin’s price to drive their whole investment approach. The prospect of a quick, lucrative gain can be very seductive. Ignoring the deep analysis for plain feeling can result in catastrophe, especially with altcoins.
Investor sentiment, as we’ve witnessed over and over again, is a capricious creature. Here’s a look at those metrics to get a sense of where we stand. We can compare percentage of addresses in profit and one-year realized volatility. For instance, low realized volatility may appear like a negative. It can even seem like a bad thing. In reality, it’s often the first sign that a new bull run is developing under the surface. A large percentage of addresses in profit implies that seller energy could drastically increase in a short period of time. This surge may be the first sign of a market correction.
I’ve seen this first hand – how investors are quick to fall victim to herd mentality, on the muddled whims of social media hype and passing fads. Extreme volatility, dangerous trading behavior and unrealistic valuations seem to spark easily, particularly in the altcoin space. Here, projects that have no practical use can explode overnight based on speculation. The Sortino ratio is one invaluable tool. This makes it an easy and intuitive measure for assessing downside risk compared to upside potential returns. It forces you to confront the question: how much potential loss am I willing to stomach for this potential gain?
The psychological traps are many. The Fear of Missing Out (FOMO) that drove the Bitcoin bubble of 2017 caused a buying frenzy. As a result, many of the latecomers were left holding the bag. Another behavioral bias, overconfidence, the belief that you have above-average investing talent can cause some really dumb mistakes. The gambler's fallacy, the idea that a market is "due" for a correction after a prolonged downturn, can blind investors to underlying weaknesses. You may believe if you own many different altcoins you’re insulated from that risk. This diversification illusion usually fails to account for just how correlated these altcoins are with Bitcoin.
The media is complicit in this cycle of hype and disillusionment. Nonstop reporting of Bitcoin’s price fluctuations creates an artificial sense of priority and urgency. This might tempt altcoin investors to focus too heavily on Bitcoin’s positive performance and overlook risks that go hand-in-hand with trading lesser-known cryptocurrencies. Investors may play right into their hands by letting go of basic fundamental analysis. Instead, they often look mostly at potential returns and not on deep dives into the technology, use cases and long-term viability of the projects they’re backing.
I've seen this play out repeatedly: an altcoin surges in price alongside Bitcoin, fueled by speculation and social media buzz. Investors are lured in, stoked by FOMO and dreams of hitting the next moonshot goldmine. When Bitcoin makes a correction, the altcoin crashes even further, wiping out countless investors along the way. Time and again, when we dig a little deeper, the culprit is a failure to conduct the right research. Then, those same people lose track of the project basics.
This isn’t to knock altcoins as worthwhile investments. Many of these have the potential to completely transform industries and solve pressing real world problems. Separating the wheat from the chaff can only be done with a disciplined approach that focuses on fundamental analysis, as opposed to sentiment-driven speculation. That means digging into the white papers, understanding the technology, evaluating the team behind the project, and assessing its potential for real-world adoption.
As my friend Hillary Adler, chief commercial officer and co-founder of BitcoinOS, said so wisely, “Hype dies quick—fundamentals survive.” While this may seem like a simple statement, it gets to the heart of my central argument here. Ultimately, the future of any cryptocurrency, including Bitcoin, will rely on what value they can deliver to users and society at large. It’s easy to get lost in the hype cycle, but the buzz often leads to immediate dividends. Yet, this strategy is a dangerous gamble that more times than not results in failure long term.
Investors can protect themselves from the emotional rollercoaster of market fluctuations by learning the technology and mechanics behind a cryptocurrency. This information gives them the ability to make better-informed decisions. This will help them avoid getting swept up in the hype and instead focus on projects with true long-term growth potential.
I become very engaged in the OverTraders.com experience and community with other traders. As you know, I’m a huge proponent of critical thinking and research in our discussions. Bitcoin price up, bullish. All of a sudden, everyone’s Bitcoin rich. Don’t campaign on shiny new technology and innovations. Do your homework and avoid gambling with taxpayers’ dollars by fully assessing the risks involved as well as the potential upside of your decisions. And that’s what it takes to live in the volatile world of cryptocurrency investing and create a long-lasting portfolio, suitable for whatever the future brings. This is a much bigger vision than just stopping the bleeding on lost funds. More importantly, it zeroes in on identifying the bellwether projects that will shape the future of finance and technology. It’s about constructing a long-term portfolio with the right knowledge and conviction, as opposed to fear and greed.
