Market volatility

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Three years ago I put a little bit of money into cryptocurrency and then the market took a huge dive. It was hard to watch this ‘investment’ dive to 25-30% of what I put in. But it wasn’t like I put in more than I could afford to lose, and I didn’t panic and sell at the bottom. I held on… or as they say in crypto, HODL (a term started with the word HOLD being written with a typo, and now standing for Hold On for Dear Life).

Late last year my investment jumped back up to break even, and then soared, and I learned my first lesson about investing, and that is dollar cost averaging. If I had not put the investment in all at once, but instead had put money in monthly, I would have done so much better. The reality is that this strategy works better than 90-95% of investment strategies. So, unless investing is the thing you do, your best strategy is to put a small amount of money in every month, no matter what the market does. The volatility works to your advantage, and no one knows when the market is going to dip.

Last night was one of those dips. Wham, 20-25% down! It’s sad, but I bet many new investors lost a lot of money and sold out when they felt the pain of watching their investment sink. For me, I’ve seen this before, and my small investment is doing better than if I had put that money into an RRSP or Tax Free Savings Account. But I’ll be honest and say that for a couple years, it didn’t seem like this.

What’s interesting is that adoption of cryptocurrency is growing, the use-cases for them are incredible. Smart contracts (that cut out expensive bank and lawyer fees), back-end tracking of supply chains, and decentralized borrowing are a few places that blockchain technology are literally ‘taking over’. Also, while many people struggle with the idea of NFT’s (Non Fungible Tokens) these are revolutionary in the way an artist or creator can gain profit from the resale of their work. And the Metaverse is something that will grow and holds amazing potential… and huge profits in the multi-billion dollar gaming market.

What’s really going to change the crypto market is the speed of adoption. If you own cryptocurrency now, you are about 2-3% of the world’s population. It took about 12 years to get to this percentage. It will probably take less than 2 more to get to 5%. Three years ago I had to drive into Vancouver to put money into crypto, and because my investment was quite small, I had to pay a premium at over 5%. Now I use Netcoins, (full disclosure, that’s a referral link), and it’s a simple e-transfer, and a 1.5% premium on the purchase. Easy. And everyone has seen adds for Crypto.com, where you can buy, stake (lock in and earn interest), and even spend (with a prepay visa) crypto.

Both the interest and access have opened up dramatically, and the adoption of cryptocurrencies is about to explode. But with this comes even more volatility. With this comes the high speculation gambles and the fear selling when the market does what it did last night. And cryptocurrency is risky. It’s not a normal thing to watch the volatility of 10-25% rises and dips and think, ‘easy come, easy go’. But I enjoy looking into the projects and investing a little bit in them. I’m not planning on taking any profits out until after I retire, and I’m not putting enough in to make a difference in my day to day living and spending habits. So the volatility isn’t much more than entertainment. Though I will admit, the appeal to put a bit more money in when I see a big dip like this is pretty strong.

One thing that I fear is that a lot of younger people, with less disposable income are jumping into meme coins (popularized coins that only serve to be traded with little other purpose). These are high risk, and susceptible to ‘pump and dump‘ schemes where they simultaneously buy causing a jump in price, and get people excited to catch the ride up, then those behind the scheme dump their coins on the market taking massive profits at the top, and leaving everyone else holding the coin at a much lower value.

A 20-year old thinking long term and dollar cost averaging, will do well. A similar person seeking massive profits will end up losing their investment 4 out of 5 times, but they will know someone who was the 1 out of 5 profit-maker and think that they can do the same. Betting on short term market volatility is risky and will cause a lot of people pain. Where as, knowing that market volatility is profitable over the long term and dollar cost averaging is what smart investors do.

It’s a simple formula where risk over a shorter time can lead to greater profits but will more likely lead to greater losses, and risk over a longer time might not get the huge gains, but it will reduce the risk of loss: Invest a small amount, repeat, and HODL. The next lesson is when to take profits… I have a strategy, but I’m still trying to learn more from people a lot smarter than me.

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