When Buying Bitcoin, Don’t Make the Mistake to Be a Momentum Trader

Illustration by In Bitcoin We Trust

Don’t let your emotions guide your choices.

We’ve been in a special situation for a little over a week. The strong acceleration in the spread of the coronavirus around the world has created a real climate of uncertainty. The containment measures taken by most countries to slow the spread of the coronavirus will have a strong impact on the world’s major economies.

This economic slowdown is likely to plunge the world into a new economic crisis. This famous economic crisis has been announced by many economists for several years now.

While waiting for this economic crisis to take hold, a real panic has gripped the majority of people for a little more than 10 days.

In order to anticipate the effects of this crisis, everyone is trying to recover as much liquidity as possible. The world is in the midst of a liquidity crisis that is impacting all liquid markets. Wall Street has lost more than 35% in the last month, gold has lost more than 10% in the last few days, and Bitcoin has also been hit hard.

While Bitcoin price had risen above $10K again in early February 2020, it is now trading at around $6K. This represents a drop of around 40%.

A Very Special Moment for Bitcoin

For the Bitcoin world, I feel that the crisis we are entering is special for at least two reasons:

  1. This is the first global economic crisis since the creation of Bitcoin at the end of 2008.
  2. For a majority of Bitcoin owners, who are more generally from Generation Y, this is the first time they have faced an economic crisis in their adult lives.

Bitcoin was created for the situation we are in now.

It will therefore be extremely interesting to see, in the coming months and years, whether Bitcoin will benefit from the measures that are being taken, and will continue to be taken, by those at the head of the current monetary and financial system.

You will have understood that I am thinking here of the Federal Reserve, and other central bankers around the world, but also of the politicians at the head of the world’s major economic powers.

These powerful people will do anything to save the fiat system, even if it means devaluing even more what you and I have.

As such, I believe Bitcoin will be a perfect hedge against currency devaluation in the difficult months ahead.

However, for Bitcoin to be able to play this role as a bulwark for you too, you will need to be able to use Bitcoin properly. Bitcoin is the only true free market in the world. As such, its price can change dramatically in a very short period of time.

This is exactly what we saw on March 12, 2020 when Bitcoin price dropped more than 50% in a few hours from $8K to just $4K.

This volatility of Bitcoin is clearly double-edged. I would even add that excessive volatility is double-edged in any market. Bitcoin’s volatility can be your best ally, or your greatest enemy. It’s going to depend on the decisions you make, and therefore on how you use that volatility.

On March 12, 2020, I still saw a lot of people make the mistake of selling all their Bitcoins in a panic.

Various studies have shown that a majority of the Bitcoins sold on that day were sold by HODLERS less than a year old. I therefore deduce that many had bought their Bitcoins when the price was above $8K or even $10K.

They therefore voluntarily chose to lose money by selling their Bitcoins at $6K, $5K, or even $3.7K for some on trading platforms like Coinbase.

These people have suffered the events of March 12, 2020.

Do Not Make the Mistake of Being a Momentum Trader

Suffering the events puts you in a weak position. And it is precisely at times like these that your emotions may override your sense of logical reasoning. The biggest mistakes in trading are made in these situations.

These people are what I call Momentum Traders.

Momentum Traders will buy when everyone is buying, and sell when everyone is selling. In fact, when the market sentiment is extreme fear, they will also panic.

For the past 5 days, as Wall Street continues to sink, Bitcoin price has been recovering. This trend has accelerated in the last 48 hours, so that its price has been at +33% since March 16, 2020:

Bitcoin price has risen 33% in the last 5 days

Once again, that was all it took to see some people getting excited about Bitcoin price again. In the space of a week, the same people who were panic-stricken are now ready to buy Bitcoins, as they are reassured by the dramatic rise in its price as Wall Street continues to plummet.

It is always the same people who act as Momentum Traders that we find here.

The same people who sold their Bitcoins at $4K while losing money, and who are going to buy back Bitcoins now that it’s back above $6K, because they’re getting their confidence back.

For many of these people, this is the first economic crisis they face in their adult lives.

I can therefore legitimately understand that they are letting their emotions overwhelm them. Nevertheless, I would like to ask them the following question:

If Bitcoin price drops below $4K again, will you once again sell what you own at a loss?

For a majority of these people, I’m afraid the answer is yes.

The Alternative Strategy to Avoid Being a Momentum Trader

So I’m writing this story to warn about this Momentum Trader behavior that will always make those who follow it lose money. Day trading is a very complex activity that should be reserved for professionals. As an individual, you have everything to lose by buying or selling in such small periods of time.

Your emotions will always play tricks on you, and it will be others who will win when you lose tirelessly.

So you need to realize right now that you can adopt an alternative to this Momentum Trader behavior. A much safer alternative for your money.

This alternative is a 5 step strategy that I recommend to all those who wish to buy Bitcoin with minimal risk:

  1. Do your own research to fully understand what Bitcoin is, how it works, and what it aims to build for the future.
  2. Make your decision based on what you’ve learned from your research, always keeping the long term in mind.
  3. If you make the decision to buy Bitcoin, HODL your Bitcoins.
  4. Stand your position no matter what.
  5. Be mentally strong so that you don’t let short-term noise spoil your first buying decision.

People who have a long term vision while being able to hold their ground are the ones who benefit most from Bitcoin. These people are often Bitcoiners.

This belief in the long-term potential of Bitcoin allowed them to continue buying Bitcoin when it dropped below $4K.

Bitcoins accumulated by Bitcoiners last week are now well protected on their hardware wallets. These Bitcoiners are now ready to stand their positions because they know that long-term strategies are the most profitable with Bitcoin.

Considered one of the best investors of all time in the traditional financial markets, Warren Buffett sums up the idea behind the strategy I have just unveiled:

“Our favorite holding period is forever.”
 — Warren Buffett

To fully benefit from Bitcoin, you must therefore avoid being a Momentum Trader, and adopt the strategy of HODLERS in the long term.

You may also like...

1 Response

  1. January 8, 2023

    […] The Bitcoin Trader is therefore acting as a Momentum Trader, which I think is a fundamental mistake. […]

Leave a Reply

Your email address will not be published. Required fields are marked *