In 2011, about two and a half years since its trading began, the price of Bitcoin jumped 30 times in just one month. A few more months passed, and the value of the digital currency dropped 15-fold. At the end of 2013, the Bitcoin price crossed the $1,000 mark and hit the headlines on all financial websites and newspapers – but within a few days it dropped below $700. Bitcoin started 2017 with a rate of less than a thousand dollars, and on December 15 of that year it reached the peak of those times – $19,650. Accordingly, those who invested in the currency, for example, NIS 3,000 at the beginning of the year and realized the investment at the peak moment, earned tens of thousands of NIS (in contrast, those who bought at the peak point lost tens of percent of the value within a few days, after the exchange rate fell within two weeks to $12,840). Throughout the first half of 2019, the price of Bitcoin fluctuated at the level of $3,000-$8,000, then in 2020 and 2021 it rose and rose until it reached a peak of about $69,000. After that, a drop was again recorded to the levels of $20,000-$30,000.
The obvious conclusion from all the above data: volatility in the Bitcoin market is very high, and it is important to prepare accordingly (by the way, volatility also characterizes other decentralized currencies. Ethereum, for example, dropped from close to $4,000 in May 2021 to less than $2,000 two months later, and jumped to about $4,600 in November of that year, and again dropped to less than a thousand dollars).
The crypto market is essentially an alternative market to the capital market, and certainly completely separate from it, but in practice you can also find similar trends in both markets and even some synchronization. In particular, the similarity was manifested in 2022, when the US stock market fell when the Bitcoin rate fell, and was colored green during the periods when the prices of digital currencies climbed up. Various experts estimate that the reason for this is that a significant portion of the shares constitute, from the point of view of investors, a channel similar to decentralized currencies in terms of the level of risk. It is also worth noting in this context that the famous stock index S&P500 has also been characterized by significant volatility over the years – but when you look at the return over a long enough period, you find that investors have earned, on average, of course, more than 10% each year.
Even a very volatile market may lead to adequate returns, provided, of course, that you behave wisely. One of the most successful investors in the world, Warren Buffett, has already defined significant volatility as an advantage and not a disadvantage – because the significant differences between the rates create opportunities: to buy Bitcoin when its rate is relatively low, and to sell the currency after sharp increases. At the same time, it is important to avoid frantic activity, i.e. buying and selling too frequently, because in this way you both pay a lot of fees and increase the risk of mistakes. In fact, it is recommended to treat Bitcoin as a long-term investment, and take advantage of the high and low points for selling and buying purposes.
Another emphasis is on understanding the parameters that affect the price of Bitcoin: the main parameter is supply and demand, but production costs are also a part of the price of the popular currency, and various developments in the digital currency market in general may lead to decreases or increases in rates – so it is important to always be on the lookout and keep up to date with what is happening in the field of the decentralized economy and its interface with the traditional banking system.
Conducting in a volatile market like that of Bitcoin requires not only “economic” tools but also tools from the field of psychology. One of the most common mistakes is to get stressed after price drops – and sell at a low price. Loss aversion is indeed a common phenomenon, but for those who find it difficult to deal with price drops, it is better to give up the possibilities that lie in Bitcoin and the other digital currencies.
Another tip for beginner players in the decentralized currency market is to set aside a certain amount of money, relatively low, that there is a willingness to lose it all. This amount can be regarded as tuition in a completely new field which, as mentioned, offers quite a few attractive opportunities (and of course it will not necessarily be required to pay the same ‘tuition’ – but in order to avoid incorrect decisions as a result of pressure, a willingness to pay it- is required if an unlikely scenario of collapse occurs in the crypto market).
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