Early Investing

Investors Overreact to Crypto Dips

Investors Overreact to Crypto Dips
By Adam Sharp
Date November 19, 2021

Bitcoin and DeFi (decentralized finance) tokens have been on an absolute tear over the last year. One year ago today, bitcoin’s price was around $18,600. Today it’s above $58,000.

Ethereum was around $500 this time last year, and it’s over $4,000 today. Solana (SOL) is up about 100x from this time last year.

Over the past week, however, there’s been a sizable correction. And a lot of people on Twitter are acting like the sky is falling. Pundits who said bitcoin was going to zero at $1,500 are smugly commenting on the “crypto crash.”

But this kind of crash is normal. This is what crypto does. Just when you think it’s going to break out, it stalls, falls, then consolidates for a while. 

Price action over recent months has been amazing. So I was actually relieved when we pulled back. We don’t want prices to go straight up. That typically doesn’t end well. It’s an old cliche, but it’s true: you have to shake out the weak hands (and the leverage).

Too Much Trading + Leverage?

I think many investors who are freaking out over this dip are likely trading short term, some with leverage. If you trade with 5x or 20x leverage, it doesn’t take a big move to get wiped out. And as I wrote in October, the average Coinbase owner only holds their bitcoin for 53 days.

Crypto exchanges make most of their money from trading and leverage fees. Coinbase typically charges 1% or more on each transaction. Exchanges don’t make much (in the short term) if people buy and hold.

And the average Coinbase user only holds their bitcoin for 53 days. For ethereum, it’s 42 days. (That is downright hideous. Buy and hold, people. This is the way.)

People are trading too often and using too much leverage. The majority will blow up their accounts as a result. 

For HODLers sitting in “spot” bitcoin or ethereum (no leverage/margin), this pullback is no big deal. But for many traders, this recent pullback was devastating. I feel their pain. I basically blew up my first stock trading account and had to start over.

That’s the real advantage of buy and hold. You’re far more likely to come out the other side with a big win. 

And it’s far, far more tax efficient than trading (assuming you can profitably trade). Paying taxes multiple times per year has a serious negative-compounding effect on long-term returns. If you can delay those taxes by holding for 10 years or more, the compounding can truly work its magic.

For now at least, you only pay taxes when you sell. Take advantage of that while you still can, because politicians are now talking about taxing unrealized capital gains (which would be madness). 

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