Bitcoin Is High Again: 7 Mistakes Investors Should Avoid Now
Bitcoin is taking center-stage again.
After seeing its share price rebound sharply in late August, BTC rose from the $60,000s to above $80,000 to around the high-$70,000s before pulling back again.
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BeInCrypto
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For those who sit on their hands as Bitcoin struggles through the year, a rally can give the thought that somehow, "I should get in right now — before it gets even higher."
That line of thinking is a recipe for disaster.
While a rising tide lifts (just) about everyone, Bitcoin is an inherently volatile asset — and history has shown that every major rally has been closely followed by a huge draw-down. Wells Fargo Investment Institute notes that Bitcoin has experienced draw-downs of more than 75% during past major downturns.
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Wells Fargo Advisors
If you're still considering taking a shot at the rising price of Bitcoin, these are the mistakes to avoid:
1. Don't Buy Based on a Rise in BTC
One of the most common mistake is to buy based on the price increase itself.
Witnessing a rally can encourage many individuals believing that a higher price means they're missing out on something.
While the price has gone nowhere recently, having a strong previous run doesn't guarantee a future one — especially not with such a steep jump.
Bitcoin has experienced a resurgence that's been impressive, but we've seen it firsthand how the market can go both above and below a given level at the same time.
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Barron's
Rather than asking,
"how much can Bitcoin rise?"
ask yourself,
"If Bitcoin were to drop by 20%, 30% or more, would I continue to invest?"
Chances are — you'll make smarter choices with this mindset.
2. Don't Put Everything Into BTC Investment
While Bitcoin has the potential to do amazing things well into the future, that doesn't mean it should occupy most — or all — of it.
Having that type of exposure can be particularly risky in the face of a major crypto correction.
Even firms considering Bitcoin a good buy for their clients emphasize the need for them to keep position size in check. BlackRock's recent research, for instance, looked specifically at a 1–2% allocation to Bitcoin before suggesting investors reconsider if their current posture is anything other than measured when it comes to their BTC exposure.
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BlackRock
The correct stance to the investment you make for BTC should be dictated by your financial situation and tolerance for loss.
Most importantly: don't take more risk than you can stomach.
3. Don't Get Too Leveraged
Being leveraged on the long side can definitely enhance what the rising tide of a Bitcoin rally accomplishes.
Whereas a 10% gain would likely satisfy the holder of BTC, a leveraged position can generate far greater returns if the price appreciates.
But that also applies on the downside.
Even a small draw-down is enough to cause a leveraged position to liquidate.
Leveraged positions tend to accelerate the swings in crypto markets: recent rallies have had a concomitant number of large liquidation positions as proof of concept.
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Bitget
If your investment only pays off if Bitcoin keeps going up — you probably have a bet as much as an investment strategy.
4. Don't Be Tempted to Think, "It Can Only Go Up"
Bull markets can create very different psychological expectations for investors.
After witnessing what Bitcoin has done in the past weeks or months, it can become much easier to believe in the perpetual upward motion of the cryptocurrency.
But it's a known fact that Bitcoin has seen some truly incredible booms and busts — with major draw-downs of about 77% and 83% included in the mix in the past.
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Wells Fargo Advisors
Now, it's not necessarily that another one in those same percentages is expected, but it's important to have a plan for the downside.
5. Don't Base Decisions on What Social Media Says About BTC
When BTC goes up, social media becomes far more vocal.
$100,000 predictions for the price come with far more fervor than they might otherwise, with some even going past $150,000, $200,000 and beyond for what they expect — and it's always possible the expectations will eventually meet the hopes (if not, eventually, the opposite).
The problem is: if you allow the confidence of an individual's opinions to dictate your decision, you're potentially letting in the risk of being taken advantage of by an over-the-top person.
Before making that purchase, know:
why you want to invest in Bitcoin
how much you're willing to invest in it
how long you intend to hold your investment
when (and why) you intend to sell that investment
how much of your investment can potentially tank
and if all you have backing your belief in the rise of Bitcoin is, "Everyone else is talking about it going up," then you probably have little real backing for why you should want to invest in the long haul.
6. Don't Disregard the Tax Aspects of Taking Profits Off the Table
When BTC goes up, it makes it far easy to feel rich before any actual gains realized by you.
When you do finally sell some shares of a BTC position taken after a huge BTC rally, keep in mind that depending on the situation in your country you're actually in — there could be tax ramifications you weren't expecting when taking profits off the table.
But, at the same time: taking some profits is not necessarily a condemnation of your belief in the long-term viability of BTC.
Rather than taking everything with you because you want the BTC to just continue rising after a rally, you could hold on to your gains just so you're better prepared.
That way, you can make more informed decisions without having to put everything in the mix at once.
7. Don't Be Foolish Enough to Mistake a Bull Market Trend for a Guaranteed Future
There's no question that many investors are bullish on BTC as the market looks toward a possible increase, given what's happened recently.
The macro trend of institutional interest has created a much bigger and more liquid asset than Bitcoin previously was, and many of the biggest investment advisory firms are in some ways starting to agree that a measured BTC allocation might actually be good.
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clearingcustody.fidelity.com
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But that doesn't remove the existence of risk in the scenario at all — especially when it comes to BTC.
Bitcoin is in a precarious situation where macroeconomic conditions, interest-rate expectations, and investor sentiment can all quickly impact risk assets. And recent reports have pointed to a potential heightened volatility in September that could follow the late-August rally for BTC.
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CoinDesk
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The smarter approach to this situation is to realize it's far more practical to build a strategy that can survive what you haven't predicted than to try and predict everything in the first place.
The Biggest Mistake: FOMO
The thing is — perhaps the largest risk of all when we're seeing prices rising is FOMO — the 'fear of missing out.'
You see Bitcoin go up.
Then you hear other people talk about the price they want to sell at.
Then you decide that you must buy right away — before you're left behind.
Investors can forget their position sizing risk management and discipline in the face of such fear of the 'next bottom' when they see prices rise.
Remember: just like you don't need to sell the top, you don't need to buy the bottom — you just need smart positioning.
Final Thoughts
Bitcoin being higher is exciting — but that kind of excitement has its costs.
The best investors don't try to predict whether BTC will rise to a certain level next, but rather make sure that they're well-prepared for the market's whims so they can respond more rationally to it.
This includes avoiding the traps of leverage, investing money that's there just to be spent, and appropriate diversification of their risk (while considering their tolerance for loss), and not leaving in favor of the most volatile opportunity without a good reason.
And most importantly — don't let FOMO influence what your future self will have to decide about his wallet.
Bitcoin is likely to continue rising — but the same holds true to the likelihood of a major correction in its price occurring as well.
