Disclaimer: I’m not a certified investment professional. All investments come with risk. Please do your due diligence before buying or selling any investment product.
I can’t go to one of the main financial sites and not see something about Bitcoin or Cryptocurrencies.
“Bitcoin up 20% today!”
“It’s a bubble!”
“Cryptocurrency Market Crashes 40%!”
“Bitcoin is Dead.”
“Bitcoin soars to new highs!”
It’s exciting, nerve wracking, exhilarating, amusing, and gut wrenching all at the same time. 20% swings in a day, from positive to negative back to positive. If you spend time watching the crypto market, it’s dizzying.
Why am I bringing this up? As someone who is invested in the stock market for the long term, but also has a little bit in cryptocurrency land, I think there is a great lesson to be learned.
You don’t create wealth overnight.
It’s impossible to create wealth in an instant.
Crashes will happen.
Recoveries will happen.
At the end of the day, the truly wealthy people are the ones who will buy and HOLD.
“It’s the Biggest Bubble in the Entire History of the World!” Sure.
I own a little cryptocurrency. There are countless articles explaining what it is, how to buy it, and where you can get it. I’m not going to go there.
Here’s my opinion on the subject: I work at a bank currently. I see the technologies in place, and after learning more about the technologies of these cryptocurrencies, there’s an excellent case to be made that this new technology could potentially be incredibly useful in the future.
I’ve put in what I can afford to lose, and if any of my holdings go to 0, then I’ll be fine in my plan to become wealthy over time. If they don’t go to 0, then great – I’ll be in a better spot financially.
Frankly, I don’t think it’s a bubble – I think it has the potential to reach a lot of people. Yes, the price of these coins is going sky high, but when you look at the actual number of people using them, there is still a ton of room to grow. Less than 1% of people are using these coins in the world. Some people are drawing parallels to the internet in the 90s when only a handful of people were using it then.
Look where we are now: everyone has multiple devices which can access the internet. Technology is the new finance, and programmers are sexy.
I’m getting a little bit distracted. I’ll put my tin hat away.
Back to discussing what retail investors can learn from Bitcoin.
“Bitcoin is Dying and Won’t Recover!”
June 5th, 2017. The price of Bitcoin reached $2,900, a new all-time high. Up 250% from the beginning of the year, it clearly had made some impressive gains.
Then, as fast as it rose, the price tanked.
From $2,900 on June 5th to $2,200 on July 13th, the price of Bitcoin had dropped 21% in a month.
Was this the end of Bitcoin?
Was it time to sell?
If you were holding any bitcoin and decided to sell in July, you’d have missed out on quite a few gains.
Fast forward to August 31st of this year, and you would have experienced a 100% gain, up to $4,900.
After reaching this all-time high, the market tanked and the price of Bitcoin crashed.
Spiraling out of control, the price of Bitcoin went from $4,900 to $3,200 in 2 weeks – an epic crash of over 30%. 30% in 2 weeks!
Was this the end of Bitcoin?
Was it time to sell?
If you were holding any bitcoin and decided to sell in September, you’d have missed out on quite a few gains.
Now, in January, the current price is in the low 5 figures. A dip of 50% is quite the drop in a month. Going from $20,000 to $10,000 has sounded the alarms on many mainstream media channels. So many reporters and news anchors calling out that Bitcoin is dying and it will never be adopted.
Because of this recent dip, do you think this is the end of Bitcoin?
Is it time to sell?
I don’t know, but probably not.
What Retail Investors Can Learn from The Cryptocurrency Market
It was October 1st, 2007. The S&P 500 just hit a new all-time high at $1,549 and things were looking strong.
Looking at the chart below, who would have thought what would happen in the next year. By February of 2009, the S&P 500 lay at under $700.
From a peak of $1,549 to $735, the market crashed. It was cut in half in just 1 year.
Many of us know how hard this was on many retirees and people who had been invested in the markets.
Unfortunately, many people sold their shares at this time because they were worried of losing more.
What’s really unfortunate is how the next 9 years have unfolded for those people not in the stock market.
From a trough of $735 to a peak of $2,802, the S&P 500 has over tripled since its low point during the recession.
A lot of people missed out on these great gains from selling. It’s really unfortunate.
Buy and HOLD!
Good markets exhibit a trend which is UP and to the RIGHT.
The stock market has had its corrections over time, but on average, has returned a positive 7% a year.
Hindsight is 20/20, but there is a lot of evidence showing that this positive trend is true in the long run.
Buying and holding over the long term has outperformed many other strategies. Passive investing beats active investing, so why do so many people let their emotions take over their rational thought?
Let’s look at another chart with the recessions greyed out.
For long term investors, such as me, selling during a recessionary time period can result in quite the missed opportunity.
I went over this example earlier using the last recession.
If you had $100,000 in your 401(k) in 2007, it shrunk to $50,000, but then rebounded to nearly $400,000.
If you would have sold at the bottom, you would have missed out on $350,000 in gains.
Buying high and selling low is no way to build wealth over the long run.
3 Tips to Weather a Recession and Build Wealth
I think I’ve hammered home the point of holding on through a recession. Selling at the bottom will not be optimal for your financial future.
The average person is horrible at timing the market, and while you may be able to call the bottom, I’m guessing you won’t (I know I’m not confident in that.)
To ensure that you don’t need to sell, here are 3 tips for weathering a recession and building long term wealth:
- Build an Emergency Fund
- An emergency fund is most important. It’s truly tragic – around 70% of Americans don’t have $1,000 in their bank account.
- What happens when the furnace or AC goes out in your house? What happens if your car breaks down, or you get sick? There’s so many unplanned emergencies to account for. Take it from me, it’s amazing the feeling of having some cash in the bank.
- An emergency fund is so critical for weathering a recession. Cash is king
- Work on Destroying Your Debt to Eliminate the Monthly Burden
- Guess what – debt sucks. I’m sure many of you think that as well. Credit card debt is the worst. Paying 20% in interest every month is not something you want to do if wealth and stability is your goal. Destroy your debt!
- Invest in Yourself and Grow Your Income
- The best investment you can make is in yourself.
- If you earn more, you will be able to save more. If you save more, the better chance you will have of being in a situation where if times get tough, you will be ready.
- Become more valuable for more responsibilities and higher pay.
- Build an Emergency Fund
Instead of completely dismissing the cryptocurrency market, I reflected and realized there is something to learn from it.
Whether or not the cryptocurrency market is the future is to be determined.
My point here is not that stocks are the best, or cryptocurrencies are the best, and you should always be buying all of these things. ALWAYS DO YOUR DUE DILIGENCE on any investment products. I don’t have a crystal ball, and I don’t know if tomorrow will be the end of the stock market or cryptocurrency market. Maybe it will? Maybe both will go up 100% in the next month? You never know.
My main point is that if we believe in a certain investments over the long run, then it’s crucial that we should not sell and instead buy and hold – in good times and in bad times.
By selling in bad times, you could potentially be losing out on thousands of dollars – which will set you back many years on your way to financial freedom.
Prepare yourself for the next storm by applying the 3 tips from above, and I know you can be successful.
Readers: During the next recession, will you be holding? Do you want to sell your assets if they go down in value by 20%? 30%? 50%? How’s your emergency fund coming along?