The crypto ecosystem is abuzz. Bitcoin hit $70,000 recently, and the chatter is deafening: "Is $77K the bottom?" We all want to think the dip is over, the bear market six feet under. As someone who's seen a few crypto cycles, I'm here to tell you: that level might just be wishful thinking. Yet history—a recent history at that—tells us we need to steel ourselves for additional turbulence.
So why this optimism, you might ask. Much of it has to do with the imminent, more or less, cessation of quantitative tightening (QT). QT, in layman’s terms, is central banks taking money out of circulation. Consider it as taking the swimming pool apart. No water (or money) no fun for all, even crypto.
QT literally drains cash, in the monetary sense of the term – draining “fiat”. This process drains liquidity from crypto, having the opposite effect of how QE first pumped it up.
The logic of the theory proposed is that keeping QT on pause would make riskier assets more attractive. This would be a huge boost for Bitcoin. Rising yields on the 10-year U.S. Treasury note, usually considered the safest of safe investments, diminish their appeal. This change places the focus on crypto, increasing its attractiveness to investors. We thought that the end of QT would be a big deal for cryptocurrencies and we still think so. It would reintroduce liquidity into the market, which QT had subsequently removed. The dovish twist at the end of US quantitative tightening (QT) might pack some tailwinds for crypto. That change in monetary policy is likely to ignite increased demand for higher yielding assets.
In fact, I’m just crazy enough to think that a change in monetary policy would certainly do the trick. Still, it’s premature to announce an unsurpassable bottom based on this key alone. QT has already had an outsized effect on financial markets. Perhaps its most important impact is its effect on cryptocurrency markets, as many have accused its issuance of driving the recent crypto price crash. It’s time to reassess our priorities and take in the bigger picture.
First, let’s back up and review Bitcoin’s history. Recall the crash from the recent high of $69,000 in November 2021 down to a low of $15,476 in November 2022. Note that 77.5% drop was a violent hacking. I know… painful, huh? It was not an outlier event. Don’t worry too much — crypto is notorious for this kind of dramatic, yo-yo-ing volatility.
Think about it: A 78% plunge in 2021-2022. An 84% decrease from fiscal year 2018. As recently as the last year, this is a 33% decrease we’ve just witnessed from March to August of 2024. And how long did it take to bounce back from that last trough. An unbelievable 144 days before reaching a higher all-time high in November.
The point is, Bitcoin always has these large, violent corrections. Nationally, we’re talking about at least 16 large corrections from all-time highs. These declines have ranged from 30% up to 85%, but all have eventually resulted in their recoveries. So, yay for $70,000, but just because we finally hit that landmark doesn’t mean we aren’t one downturn away from the end.
I’m not looking to rain on the parade here. I’m a crypto-believer in my own right. I’m a big fan of realism, too—but realism in a positive sense. The models may promise a lot, but allowing yourself to get swept up in the hype can lead to dangerous decisions.
One of the greatest dangers with crypto lies in its extreme volatility. These savings bonds are unlike the ones your grandma used to buy. Digital currencies, which are highly speculative and volatile and not backed by any central bank or government. Without this, it allows them to engage in tremendous volatility, often due to reasons that are difficult to ascertain.
On top of that, there’s the issue that they’re uninsured. If your crypto exchange gets hacked or simply goes belly up, you’re out of luck. Currently, there are no insurance protections for investors against these types of losses through hacks or crashouts on crypto exchanges. It’s a little risk you have to be ok with taking.
Then there’s the complexity! Moving and holding crypto can be complicated even for the most technically proficient among us. Cryptocurrency storage and transactions in general are not intuitive or simple. This complexity presents a huge barrier for investors, making it difficult for them to responsibly manage their investments. This complexity can create challenges when trying to protect your assets in a safe and secure manner.
Lastly, there are regulatory and tax risks. In addition, the Financial Crimes Enforcement Network (FinCEN) has been looking into cryptocurrencies. They are investigating possible violations of the Bank Secrecy Act (BSA) and anti-money laundering laws. The IRS has not yet figured out the correct approach to taxing crypto. As a consequence, investors may be subject to short-term or long-term capital gains tax rates. Making decisions in the face of such uncertainty can create a further complex layer to your investment decision-making.
So, what can you do to protect yourself?
First, invest across asset classes. It’s a mistake to go all-in on Bitcoin. Investors can reduce their exposure to Bitcoin by diversifying their portfolio with other assets, such as stocks, bonds, or other cryptocurrencies. Diversify your portfolio. Investing in multiple asset classes protects your wealth from cascading market events.
Second, determine a budget. Determine what you can afford to spend on Bitcoin and be consistent. Create an investment budget for Bitcoin that investors are willing and able to stick to. This strategy allows them to steer clear of over-investing and being caught off-guard by potentially crippling market volatility. Avoid FOMO (fear of missing out) decision making.
Third, never stop learning. Understand your new competitive landscape. Stay connected with current market intelligence and emerging trends. Smart investors need the latest up-to-the-minute market news and trends at their fingertips. Likewise, they need to keep an eye on shifting monetary policy, which can have a profound effect on Bitcoin’s price. The more you understand, the better prepared you’ll be to make intelligent decisions.
Fourth, use stop-loss orders judiciously. This can protect you from the damage if you find the market has suddenly moved against you. Investors will be able to change their cryptocurrencies for stop-loss orders to restrict their losses if the worthiness of Bitcoin dips beneath a specific amount. It’s the equivalent of having a supercharged automatic safety net.
Consider dollar-cost averaging. This is done by dollar-cost averaging, which means consistently buying a set dollar amount over time – no matter what the market conditions are. Investors can benefit from changing to dollar-cost averaging. This method is known as dollar-cost averaging, which means you invest a set dollar amount on a consistent basis regardless of market conditions. It can help you get started by smoothing out the volatility so you don’t take on as much risk overall.
I’m not suggesting Bitcoin doesn’t have further upside potential. It should — because, quite frankly, it can. What I am saying though is that we cannot overlook the lessons of the past. Whatever happens, however it plays out, crypto is a chaotic adventure and we all need to get ready and take it seriously. Blindly wishing that $77K is the low point would just lead to a lot of disillusionment. Rather, as an alternative, it’s time to get honest, bet smart and have fun along the way, no matter where the chips may fall. We are passionate about empowering traders and investors—our work on OverTraders.com reflects that mission. We follow it up with deep analysis of all financial markets from stocks to crypto, augmented with real-time data and hands-on educational resources. As always, information is our greatest weapon.
