Blog | Cryptocurrency

Cryptocurrency Madness

Why you should "stop" to make gains

I often hear new investors say with confidence, “I don’t have to worry about a market crash because this time things are different.”

Seasoned investors know better. They know that markets always go up and down. They know that when a bull market is hot, it will come crashing down at some point in time—and the higher a market rises, the faster and harder it crashes.

Do you remember the early 2000’s, when people are investing in companies without any profits during the dotcom bubble? When lots of people invest in the unknown you better believe a mania is on.

As the old saying goes, “There is nothing new under the sun.” That includes booms and busts.

Understanding the madness

Sir Isaac Newton, who lost most of his fortune in the South Sea bubble, is quoted as saying, “I can calculate the motions of heavenly bodies, but not the madness of people.”

When there is madness and everyone is thinking about getting rich quick in the market, it’s usually just a matter of time before many people lose everything. Often this is because people start investing in the markets with borrowed money, instead of first investing in their education and experience. When that happens, many people sell in a panic.

Of course, that is when educated investors really become wealthy, profiting off the madness of others.

That’s not to say crashes are bad, but the emotional panic that occurs at the times of such financial downturns can be. The problem with uneducated investors is that they do not understand real bear markets or real bull markets, so how would they know what a market crash and a bear market feels like, especially if it goes on for years?

That is why the new area of investing, crypto investing, is so dangerous without education. It is hard to find a good teacher because o few have enough experience and comprehension of volatile markets. This is why I have brought my cryptocurrency expert and content provider of my new Rich Dad Cryptocurrency newsletter, Jeff Wang.

Jeff Wang

Thank you, Robert. Crypto drama, crypto mania and crypto madness are real things. Cryptocurrency investing can be very volatile. That is not a bad thing, a lot of profits can be made from volatile swings. To many, when the volatile time goes down, many consider that a terrifying day in the crypto markets. Because of that, I thought it would be fitting to have a section on how to handle what will certainly be inevitable corrections where every asset can fall 30% in a moment.

The first thing to do is to expect them. If you know that some days will correct 30%, you will be much more level headed when they occur. This also means that you should never really be all-in on your crypto investments, you should have some cash on the side for corrective days to buy things that suddenly became very cheap.

You need to know what distinguishes a correction and bounce from a sustained downtrend. That’s why you need to keep up to date with the macroeconomic news as well as the crypto news. This is one of the things I do in the Rich Dad Cryptocurrency Newsletter. I do this so you can understand the “why” of things moving. All in all, if you are super unsure of what to do, you can always just buy a partial amount, leave the rest for more information, and keep yourself sane.

The other angle is that you should never put into crypto more than you are afraid of losing. I have of course heard of who people put in 5% of their net worth and turned that into 90% of their net worth. I get it. That is the dream. However, when uninformed people put in their savings on volatile investments and lose it all, that tells me that they weren’t accounting for risk. Crypto is inherently a risky investment. It can go 1000% (DOGE just did this recently), but it can go down 90% as well. Keep this in mind.

Risk Management in Crypto

Now, how do we handle this strategically? One tool is Stop Losses. That is when we are in an irrationally high bull run. This means setting a stop limit order while a crypto asset is moving up, and you can keep moving the stop up to capture more and more profit (a trailing stop does this too). When corrections hit, you can wait out the storm sitting in cash. There is a downside, you could possibly miss a bounce, and some profit.

The other strategy is to take profits on the way up. Crypto assets in DeFi (Decentralized Finance) especially can easily swing 30% each way. So why not just convert some of that to cash every once in a while, and set it aside? This is especially true during days where it’s “too good to be true”. Those are the times I really set aside things to cash and look for coins that are heavily hit. However, be careful of missing out on a big run. This month I sold BAO on its way up and missed out on a 10x run. Yes, I’m not perfect. Sometimes being cautious can prevent making huge gains.

Now for the action, when you see a coin go up, psychologically, you will want to buy in. Be careful, probability says, it will head back down. Conversely, when you see a coin going down in value, you are going to want to sell it and take the loss.

However, it is more likely in a sideways market to return to the mean, but your mind will tell you to take the loss. This of course could keep going down, so you should know what you’re buying. If you’re buying Ethereum, it has slightly less probability to keep going down versus a random coin mentioned on Twitter or YouTube for example.

During these times, remember to set price targets, then set buy and sell limit orders. For the month of January, I usually had a low buy order going to sleep, and I slept soundly. If I woke up and everything was negative, I’d actually be sort of happy that I caught some good deals.

In bear markets, I usually sell on 15-20% gains. I never want to risk the corrective swings. We’re not in a bear market yet but when you experience it, you’ll notice it’s easier to trade because you are no longer not knowing when to sell. However, if you’re on the wrong side, you could end up losing more.

This isn’t a financial advice blog, but what I listed above should be taken into consideration as you think about your own personal style.

In summary, expect corrections to happen. Don’t put more into volatile assets than you are worried to lose. Set stop losses to preserve gains. Take profits on the way up or on swings and remember to utilize limit orders to mentally control your targets.

Hope that helps! I believe we going to see some bull runs that may make us “accept” this as a reality, but I believe this is a bubble and we are in irrational pricing territory.

Jeff is seeing the crypto markets as a bubble. I completely agree but that is no reason to ‘go all in’ with your hard-earned money. You need education first. Only the educated are in the position to win.

Rich dad simply said, “It is not possible to predict the markets, but it is important that we be prepared for whichever direction it decides to go.”

He also said, “Bull markets seem to go on forever, which causes people to become sloppy, foolish, and complacent.”

Today, times are pretty good for investors. The question is, are you ready for the next bear market? Because it will come, and while it’s easy to make money in a bull market, only qualified, educated investors will make money in the next bear market.

Take advantage of this time to invest not only in the markets, but also in your financial education. It will pay big dividends when others are losing it all.