We often think we are in better control of our emotions than we actually are.
The way our emotions and feelings work is volatile in nature. This volatility can also be referred to as our reactions. These "reactions" occur when we are triggered by a specific event.
Example:
- The price of Bitcoin shoots up 30% overnight and we think "oh shit i got to get in now..I'm going all in...I've waited too long and the price is going to the moon". FOMO. Fear Of Missing Out.
Let me explain the possible consequence of "chasing". This is also known as playing out our reactions. Also known as being Volatile. Also known as making decisions from the starting point of Emotion. The starting point of movement stemming from an instability within oneself.
So - let's say you threw down everything after the 30% jump in Bitcoin. The Market then corrects 5%. Ok - "whatever", you say..."it's just 5%". Market price of bitcoin drops another 7% over the next few days. So now your at a loss on your buy in by a margin of 12%.
Note: It is a most unfortunate thing that the majority of humanity operates according to triggers/reactions. Consider the consequence of this type of conditioned behavior on a large scale. FOMO. and FUD. Fear, Uncertainty and Doubt.
- Potential Market behavior play out - price of Bitcoin has now dropped 12% in the last week and a bunch of players in the Bitcoin space who were holding before the 30% jump are like: "Shit....I had 30% profits...and now I only have 22% gains...I'm taking profits now and selling some bitcoin." Many players follow suit. The price of Bitcoin falls 14% over the next week.
Recap: You went all in on the Bitcoin and the price is now sitting 26% lower.
Consider: Dollar Cost Averaging in the Short term, Medium Term, and the Long Term
Minimize Risk
Create consistent "Emotionless" behavior
Create a better probability to achieving and insuring a better dollar cost average on your Investments. (Bitcoin and Other)
Note: Dollar cost averaging principles works for "self-investments" beyond money...which we can refer to as "time investments"
How dollar cost averaging works is as follows:
- Create a Plan - Specifically what you are "wanting"
- Establish the amount of "time/money" you are willing to give.
- Structure the plan by Spacing it out over days, weeks, months and even Years!
The real beauty of "dollar cost averaging" is that you minimize the downsize/losses and maximize your gains/potential. It's Brilliant.
- Pro Tip - If you have a lump sum of money already and you are bullish on an Investment - it's been proven to be more effective to "buy in" more quickly than rather stretching it out over the long run.(Important note - study done by vanguard in regards to stocks and bonds...not necessarily true for crypto...but maybe...just saying the specifics of the data based on link listed just below) Keep in mind though - the greater the risk the greater the reward. "Why Dollar Cost Averaging is a Lousy Retirement Strategy"
- Nobody can perfectly time the markets always...maybe a few times...sure "get lucky"...but always....no...nobody can. If anybody tells you they can 100% always predict the future outcome of the markets, their full of shit and you better get away of them because shit man...You don't want to be shit out of luck.
Example: $10,000 Dollars committed to Investment in Bitcoin
High risk option - Space out your Bitcoin buys over the course of 1 - 2 Months. Roughly $1000 every 5-6 days.
Medium risk option - Space out your Investment over the the course of 3 - 6 Months.
Low risk option - Space it out over the course of 6 - 12 Months.
Important Note - Once you complete this cycle - as a structured plan where you choose your risk accordingly - there's no emotion - it's boring from the perspective that it's a "self-movement"(emotionless response) real time application. And actually it's entirely possible to automate the buy processes. So in that regard it's a set it and forget it kind of thing. All of a sudden the day to day movement of the price action doesn't matter so much. (There's a lot of life lesson parallels here I will get into in an upcoming post)
Important Note 2: This approach with Dollar cost averaging is based on one's assessment of "growth over the long term" - 12 months and beyond
Time Cost Averaging
To be continued upon in my next post!
Stay Tuned
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