The Case for BITCOIN $100,000 – Part Three

As part of our weeklong series on why and how we think Bitcoin is going to $100,000, we have decided to share a note we wrote a few years back. This was RIGHT when Bitcoin was taking off!

We think it is helpful to look at our thoughts in the context of that moment. While cryptocurrency had been around for quite some time already, it was 2021 when it entered the mass consciousness.

Most importantly, the advice we gave at the time is still relevant today.

Even if (when?) Bitcoin is going to $100,000 – these are still good rules to consider.

Enjoy the note!

Before 2021, "cryptocurrency" and "bitcoin" were terms and concepts most investors had heard about but weren't actively involved in.

But as we kicked off this year, interest in this corner of the market has exploded.

There are many reasons behind this, including increased interest in investing across the board, fears about unlimited printing of government fiat currencies, and a series of endless tweets by entrepreneur and Tesla (TSLA) CEO Elon Musk.

As a result, most folks are familiar with the massive volatility that this sector has seen over the past few weeks. Just look at this chart of Bitcoin...

The emergence of this asset class has allowed many investors to make (and lose!) a tremendous amount of money and to do so quickly. It also has created an incredible trading vehicle for those with a real plan.

What strategies do you employ to navigate the volatility of cryptocurrencies like Bitcoin? Let us know in the comment section online.

So, given the recent volatility in the sector, here are three factors to consider when deciding how to handle it...

1. Remember That Volatility is Symmetrical

This is a simple concept... An asset like Bitcoin that goes from $10,000 to $60,000 in six months can quickly go to $30,000 in six weeks.

Compare this with a mega-cap stock like tech giant Apple Inc. (NASDAQ: AAPL). The most that Apple trades in a day is a couple of percentage points one way or the other. This means you're highly unlikely to make double-digit returns in a short time frame... And triple-digit returns can take years. Apple offers less upside in a short time frame and far less risk.

As an asset class, crypto is different. It's much less mature, with much less institutional support and many individual – and less sophisticated – investors. "Less sophisticated" shouldn't be taken as an insult, but these types of investors act more emotionally as a group and tend to buy as the asset hits new highs and sell when it sharply corrects. "Buy high, sell low" is never where you want to be.

Crypto assets have huge volatility, so don't be surprised by massive moves in either direction.

2. Understand the Volatility in Order to Manage It

One of the biggest misunderstandings about the recent volatility in crypto is that it's only happening because of tweets by Musk or comments by the Chinese government about a crackdown on Bitcoin mining. But this isn't the real story...

The reason crypto has been so volatile (and to the downside) is because of the liquidity setup that occurred because of the enormous run higher.

Let's consider ethereum. At the start of the year, it was trading for less than

$800 and peaked at more than $4,000 five months later. Many investors made a lot of money. But as it increased, many – if not most – folks bought at higher and higher prices.

Investors were buying because Ethereum was going up. Once this momentum was exhausted, these folks lost their reason to own the asset. If Ethereum wasn't going up anymore, they were ready to jump ship, and they bought in at high prices.

This is why we say that when an asset is highly overbought – with a relative strength index ("RSI") greater than 90 – it never consolidates by going sideways initially... It goes lower.

If you don't sell high when the assets reach these overbought levels, you leave yourself vulnerable to losses – the size of which you may not be willing to stomach.

The Musk tweets and comments by the Chinese government were just the spark. The tinder was the incredibly overbought situation.

3. Plan the Trade and Trade the Plan

The first key here is position sizing. While some intrepid folks are willing to live through 20% daily swings in the net worth of their investing portfolio, that doesn't represent most investors.

The best way to handle highly volatile assets like cryptos is to keep the positions appropriately sized.

Do the following exercise: say to yourself, "What if this asset were to get cut in half in a day? What level of loss to my overall portfolio would I be willing to stomach and still add to the position? Would I add 5%? What about 10%?"

Based on this exercise, size your position appropriately so you're on the right side of your emotions when dealing with losses.

Another key is to break your position into a "trading" portion and an "investing" portion.

With your investing portion, you should have a long-term view. If that's how you view crypto, don't even look at the day-to-day price swings.

But if you're trading, be sure to trade. One of the biggest mistakes folks make with "buy low, sell high" is forgetting to sell high...

If you're selling Bitcoin at $60,000, buying it at $30,000 is much easier.

The worst – and most common – mistake of traders is going in as a "trader" and coming out as an "investor" when the position goes against them.

I don't think the major cryptocurrencies are frauds or Ponzi schemes. There are legitimate reasons why investors – and institutions – will continue to utilize them. With a market cap in the trillions, they aren't going away.

They also represent an incredible opportunity for individual investors – and traders – to make money. But this needs to be done with a plan... And you, as a trader, need to be appropriately prepared.