The market can remain irrational much longer than you can remain solvent – A. Gary Shilling
December tends to be the time when we look back at the year and see how things have gone.
And one of the things that has not gone the way people thought it would is the whole crypto-currency space.
I first wrote about blockchain in March 2017 – the year Bitcoin exploded in value. By the end of that year, it was trading at $16,000 and, at the start of 2018, we were asking whether traditional investments were dead and it was time for alternatives to take over.
Which reminds me of what happened in 2008 to oil prices. They shot up, rocketing through $100 a barrel, heading towards $200 a barrel.
Goldman Sachs, a firm that you would think knew what it was doing, mused about the possibility of oil at $200 a barrel.
My flirtation with crypto lasted all of three months. At the start of this year I bought Ethereum in January at $725 and sold at $650 in March, a loss of 10.3%.
I explained why in that post – setting out how my trading system worked.
Before I put any money into the market I created a trading system based on Point and Figure charts.
This method helps to find the signal in market noise and, importantly, gives you a way to know when to pull out of your trade.
In essence, when I bought, I set a stop loss figure – a value below which I would close out my position.
That line was at 650 – the red line in the chart – and when I went through it, it was time to sell.
I also needed a way to look at whether I should enter the market again.
I’d only do that when it was clear that the market had turned – which would happen when prices went through the bearish resistance line, a roof of numbers that the price would have to push through.
It hasn’t done that this year – the price has come close but not close enough.
And, as the year has drawn on, the price has continued to fall.
Ethereum is at around $85, Bitcoin at $3,200.
Bitcoin has dropped by 80% this year. If I had stayed in Ethereum, my losses would have been over 88% rather than 10%.
So, with the benefit of hindsight, I’m glad I got out when I did.
But what’s clear is that at the time no one had any idea what was going to happen.
And that’s one of the things that we need to get our heads around.
There are an infinite number of possible futures – and we’re never going to be able to tell which one is going to happen.
That makes decision making hard because you don’t know whether you’re taking a gamble or not.
If you buy something because you expect its price to rise then you’re speculating.
Whether it’s houses, stocks or currencies, we’re buying hopes and dreams.
And that’s dangerous.
Crypto is a pure sentiment play – it’s worth what someone else is willing to pay for it.
And right now, fear is in charge.
There is no reason why the market cannot go down further.
It’s been a year of devastation, after all.
But, things can change – things go in cycles.
Less than a year after Goldman Sachs did its piece about oil the price fell to under $30 a barrel.
There is a point where enough people think the price is low and come into buy – starting that process of supporting and pushing prices higher.
Maybe next year – maybe in a couple of years. All we can do is watch and wait, and be ready to act.
At these times we would do well to remember the Scout motto Be Prepared.