Bitcoin (BTC -3.30%) is gaining widespread acceptance as an asset that will be around for a while, but it can still be intimidating for many investors. It's easy to see why that's the case, as everyone has heard tales of investors losing everything with cryptocurrency investments.
But huge losses are not a foregone conclusion, and with a very simple trick, you'll even be able to avoid one of the most serious mistakes that people tend to make with Bitcoin. Let's dive in.
Some investors make this mistake over and over
To start, let's look at a couple of snapshots of Bitcoin's price action to see where it might be possible to mess up your investment, starting with the one-month view.
Bitcoin Price data by YCharts
As you can see, if you bought the coin at the start of last month, you have lost more than 10% of your investment during the past 30 days. If this were to happen in your retirement account with a stock right after you bought it, it would probably cause consternation. The potential outcome is clear: This one's headed straight to zero. Your more risk-averse friends and relatives would be cautioning you or even pleading with you that it's better to get out now, with most of your money, while your losses aren't so serious.
But wait. A small dip in the coin's price is far from a death knell, and selling could actually be a serious mistake. Inability to tolerate temporary losses could therefore lead to missing out on much larger gains. Let's zoom out and take a six-month view:
Bitcoin Price data by YCharts
Here, there is still a risk of making the same mistake of selling prematurely.
This time, however, the rationale from anxious onlookers and perhaps from your own brain typically look a bit different. After such a rapid run-up in the coin's price, so the proponents of selling will say, there's simply no way that its bull run could continue. Besides, Bitcoin is a bubble, and it will go to zero someday, so it's better to get out now, with a tidy profit, before you ultimately lose most of your money.
The fact that a bull run is ongoing is not evidence that the bull run will promptly end, though it is true that eventually it probably will. Furthermore, the fact that all bull runs end is not evidence that the price of a security will fall to a lower level than you purchased it at. Cutting your gains too early could ultimately be as destructive to your portfolio's growth as cutting your losses too soon.
Now let's peek at the 10-year period:
Bitcoin Price data by YCharts
Study this chart. Where would you be the most tempted to buy or sell your Bitcoin?
Be honest. If you are like most investors, the temptation to sell would hit you the most intensely during the sharp downward slopes after the peaks of the price, when your investment is rapidly losing value. The exact opposite situation is when you'd be the most inclined to buy, precisely when the price is peaking, and immediately before it starts to fall.
One more question: Where on the chart would it be the most optimal to buy or sell? It's obvious that the correct move would be to buy during the lows, and sell during the highs. Take a closer look at roughly how much time elapses between the troughs and the peaks.
Herein lies the origins of the biggest challenge with investing in Bitcoin, or any other volatile cryptocurrency. With perfect timing, you'd need to hold onto your coins for a couple of years for the investment to work out optimally. Most investors simply aren't patient enough to make this basic strategy work. Others are overwhelmed by their panic during downturns such that they sell before their patience can reward them.
Have no fear. There is an easy remedy.
This trick is a magic bullet
For most people, it is not possible to time the market, or Bitcoin. Remember, you don't get to see the 10-year chart for the coin's future performance on the day when you sit down to make your investment. You only get to see what happened in the past. That means relying on patience is all the more important, as is using dollar-cost averaging (DCAing) rather than bulk purchasing of coins.
But that isn't even the trick, it's just a tool that helps you mitigate the impact of daily price fluctuations on your investment's total value.
To avoid selling your shares too early, before hitting the price target outlined in your investing plan, the most important trick is to simply not look at your Bitcoin or crypto investment every day.
Looking at the price of Bitcoin does not change it. Looking at the value of your investment does not help it to gain value, or recover lost value. Stressing about your investment also does nothing positive -- but it can erode your patience, and cause you to make the serious mistake of selling before it's the right time.
Setup your DCA plan with your brokerage, then close the browser window. Find some distractions, preferably enjoyable ones that can occupy you for months or years on end. Check back once in a great while, and if you haven't yet hit the price target you specified, try checking again much later. Out of sight is out of mind, and thus out of opportunities to falter.
Bitcoin is an investment to hold for the long term. Don't trade in and out, and don't be afraid to game your own psychology to build the patience you need to profit. When in doubt, zoom the chart out, take a peek at the trend, and log off.
