Bitcoin Don't invest recklessly

I posted about this just a few months ago, but I feel that it's necessary to repeat. The Bitcoin price is on an unbelievably ridiculous upswing which is rather likely to be a bubble. If you're trying to get rich quick by dumping your retirement funds into BTC at $10k, then your "investment strategy" is not much better than someone betting everything on a game of roulette. High-risk-high-reward investing is not necessarily bad, but you have to seriously look at your thought process to make sure that you're not:

Being blinded by dreams of getting rich quickly, similarly to people who dump money on very-negative-EV lottery tickets.

Getting wrapped up in "HODL" memes, reddit comments, and other groupthink, which is sometimes fun, but absolutely the last appropriate source of investment advice.

Acting based on panic thinking like, "OMG the price is going to $1 million and I will miss my chance forever if I don't buy right now" or "OMG the price is going to $0.01 and I will miss my chance forever to retain some value if I don't sell right now".

Investing more than you can afford to lose. Bitcoin is HIGHLY, HIGHLY speculative. No investment advisor would tell you to put all of your life savings into MSFT or whatever, and MSFT has a market cap 4x larger than Bitcoin. Although I believe that it is very unlikely, there are several ways in which the value could drop precipitously, even to zero. For example, there is no mathematical proof that the cryptographic algorithms used in Bitcoin are actually secure -- they are merely believed to be secure because nobody has been able to break them after many years of intense scrutiny. (I'm not here recommending "diversifying" into altcoins -- altcoins are almost all complete trash, and price-wise they follow BTC but with even more volatility, so they're not really useful for diversification.)

It is entirely possible that the massive price increase of the last year is based on lasting fundamentals. In addition to things like the fairly recent subsidy halving, the defeat of B2X, etc., the world fiat-based economy is in many ways on very shaky ground, and getting worse all the time. There are many good reasons why BTC should have a larger market cap than every fiat currency combined. It's even possible that the price will increase quite a bit more from now. But for goodness sake, don't think that Bitcoin is the first-ever infinite-money generator that will continue to rise exponentially forever (in real terms). I can nearly guarantee that there will be a large and long-lasting crash/downturn at some point. Maybe it will be $10k to $5k, maybe it will be $50k to $30k, who knows. But if you're thinking for example that the current $5k+ price range is absolutely secure after only existing for a few months, then you're traveling blind through very dangerous territory.

Some points to consider:

Buying near the ATH is very risky, and while it can be correct/profitable, it puts you on the wrong footing. You need to buy low and sell high to make money.

On 2013-11-29 (exactly 4 years ago) the peak ATH hit $1163, and then fell to $152 by 2015-01-13. That's a drop of 86.9%. Imagine this happens again: The price drops sharply to $2000 or something and then just continuously decreases down to a low of $1,432 (an 86.9% reduction from today's ATH) over the course of a whole year. I'm not saying that this will happen, but it's happened once and it can happen again. Could you survive this?

Bitcoin is experimental, and it is probably imprudent for someone who is not a true believer in the soul of Bitcoin to invest a lot into it. For example, I personally wouldn't invest more than a few percent of my total assets into ETH even if I felt very confident that it would rise in price because I simply don't believe in its philosophy or long-term value.

To reduce risk, it is frequently recommended to allocate assets by percentage, and rebalance upon large price movements. Eg. If you previously decided that you want to allocate 50% of your wealth in BTC (because you are a super big true believer), but BTC is now 90% of your wealth because the price increased so much, it may generally be advisable to start selling to rebalance your BTC allocation back down to 50%. I'm not saying that it is always absolutely wrong to have 90% of your assets in BTC or whatever, but it should be because you are intentionally choosing to do so, not because the price got away from you and you never really considered that you now have 90% of your wealth riding on one thing.

Avoid panic buys and panic sells. Dollar-cost-averaging over a long period of time is often a good strategy.

Nothing rises in real value to infinity. That's impossible. It is possible that 1 BTC could someday be worth infinite dollars, but that just means that dollars are worthless in that hypothetical scenario. BTC probably does have plenty of room to grow in real value before it completely takes over the world, but keep in mind that there is a ceiling.

If BTC were to reach values like $100k-$250k, that'd probably cause/imply that the prevailing economic regime has completely fallen apart. At some point in that price area, people around the world would probably lose substantial faith in fiat currencies. A good result, but ask yourself: do you expect the prevailing economic regime to go down easily?

I'm not telling you to buy or sell, and I'm not giving financial advice here. I'm just urging everyone to think rationally, not emotionally or recklessly.


Sourse: