Bitcoin has been running through another of its volatile periods recently. After climbing from around $3,000 in September to around $7,850 more recently, the price of the currency fell back, reaching as low as $5,600. It’s since recovered some of its lost ground but for anyone with large bitcoin holdings, the movements have been large enough to strike some serious fears.
It wouldn’t be the first time. Between June 11th and July 16th, the price of bitcoin fell by a third from just over $3,000 to a little under $2,000. At the start of September, it was worth about $5,000; two weeks later, you could buy a bitcoin for $3,226.
So when the price of bitcoin takes a dive the first thing to remember is that this is normal. Investing in a cryptocurrency isn’t like buying a government bond. There are no guarantees and no regulations. The price moves all over the place–and just as it can drop like a rock, it can also rise like a rocket. And often in quick succession.
The second thing to do is to look for the reason for this movement. The fall in mid-November came after a specific event. A group of developers and miners called off a plan to hard-fork the currency again. Segwit2x would have created a new form of bitcoin that allowed for larger blocks. In effect, it would have created faster and cheaper transactions. When the plan failed, some people moved their money into Bitcoin Cash, a faster form of bitcoin created from a previous fork. The coin shot past Ethereum to hit a market capitalization of $30 billion. The value of Bitcoin Cash doubled in 24 hours.
That’s a good reason for a decline. Bitcoin Cash has some advantages that bitcoin lacks. Some investors would have been holding out for the fork so when it went through they bought what was available. Analysts expected the price of bitcoin to flatten out at around $5,000.
There’s no way to know whether they’re right, of course. No one can predict which way the market will go–no matter how well-versed they are on cryptocurrencies–so you just have to make your own predictions. Deciding whether to stick or bail, or even buy and hope that the market rises again is always going to be something of an intelligent gamble. Once you’ve found the reason for a sudden price drop, you’ll have to decide whether you think that reason has a price floor or whether it’s fatal enough to send the price even lower.
There are no easy answers when investing in bitcoin. Just understand that the ride is always going to have some scary moments, and when those moments strike, ask yourself whether a ride this rough is really for you. If you’re prepared to hold on through those dips, and if you can afford to lose your investment, then don’t sweat the falls any more than you should get too excited about the sudden rises. But if you do need that cash, you might want to look at those dips as a warning to find somewhere more stable to keep your savings.
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