The following guest analysis article is written by Taki Tsaklanos of InvestingHaven.
All cryptocurrencies went through a rollercoaster on Friday and Saturday. Most well-known cryptocurrencies lost up to 40 percent in just 48 hours, only to recover on Sunday. Most cryptocurrency holders had a hard time digesting this.
How to handle this extreme volatility? Is this the end of the bullish cycle in cryptocurrencies, and, in particular, Ethereum? Is a bullish Ethereum price forecast of $550 still intact after this week's price drop?
The challenge for most cryptocurrency owners is that they do not have a background in traditional investing, and, hence, do not have all wisdom on how to handle volatility. The point is that cryptocurrencies behave similar to other markets, but the speed of change is simply ten times higher.
Therefore, we can rely on traditional investment principles to handle situations like the ones we experienced this week.
InvestingHaven identified the 5 most important lessons which apply to cryptocurrency investing, and help cryptocurrency owners handle volatility. As we discuss these 5 tips, we derive the answers to the questions outlined above. We focus on Ethereum as we consider it the most promising cryptocurrency based on our current outlook.
1. Volatility is normal
Every market suffers from volatility. It's just that some markets are much more sensitive to it than others, for a diversity of reasons. Commodities and currencies are known to be very volatile. The cryptocurrency space is simply much more volatile than any other market we known. That is because the transaction speed and cost is as low as it can be.
Moreover, so far, cryptocurrencies are not really held by large investment companies. Those type of investors tend to be less aggressive in trading, most of them hold for the longer term. So that stability is missing at this point in the cryptocurrency market, but it will change sooner rather than later.
Handling volatility is a mental game. The simplest tip is to control emotions when prices move to the upside (most of the time), as that is a skill you can apply when prices are falling sharply (happens exceptionally).
2. A flash crash is normal
This week's price drop proved to be a flash crash. That is also a normal type of event. Stock markets have seen many flash crashes. Think of the flash crash of 2010, the one in 1987, and so on.
A flash crash is a good thing essentially. It removes speculation in markets.
You do not have to focus on the drop itself, but rather on price levels. For instance, Ethereum remains in a long term uptrend as long as it trades above $80. That is our deduction via our Ethereum price crash analysis.
That is another simple trick to control your emotions, along with the acceptance that flash crashes are normal practice in markets.
3. Hold Ethereum for the long term
At the end of the day, what does a 40 percent crash mean? In the bigger scheme of things, it can be important or it cannot. It is relative, and it depends on the price from where it fell.
A 40 percent decrease after Ethereum rose to $210 is meaningless.
Holders of Ethereum should focus on their holdings on the long term. Imagine how much untapped potential there is with cryptocurrencies. Let's not forget that the finance sector, particularly payment services, are among the few exceptions that were not impacted by the digital revolution.
The upside potential is huge, so you better focus on the long term instead of one flash crash.
4. Buy the dip
Smart owners of Ethereum have bought when Ethereum was falling. A discount on your favorite cryptocurrency is a good thing at the end of the day, similar to a discount of your favorite car or restaurant.
As Ethereum will rise, and it definitely will sooner rather than later, you can start identifying interesting entry and exit price levels. Once, for instance, Ethereum has reached our 2017 target of $550, you better make sure to get some money off the table in order to step in at a lower price that you believe makes sense, for instance $350.
5. Manage your cryptocurrency portfolio
The last point implies that you actively manage your cryptocurrency portfolio. That is the most fundamental way to manage your holdings in traditional investing. A well-balanced portfolio of cryptocurrencies with a long term horizon will deliver unimaginable results in 7 years from now.
All trading carries risk. Only risk capital you’re prepared to lose.
Featured image from Shutterstock.