Bitcoin has come back from its crypto winter lows. Is it back for good? Are we in for another boom and bust cycle? Abraham Lincoln said that you can fool all of the people some of the time and some of the people all of the time. Does this apply to Bitcoin, or should we compare crypto winter to the worst stock market crash in history and how stocks came back to be the best long-term investment for most people? What correlations are there in Bitcoin versus the stock market and how should those correlations guide an investor?
Playing the 1920s Stock Market and Going Broke
In an article about intrinsic stock value we wrote years ago about how back in the 1920s folks “played the stock market.” Stocks went up and up and it made little difference what you invested in as virtually any investment went up in value. You could even borrow money from your stock broker to buy those stocks. Then, in the parlance of the times, the chickens came home to roost. Most of the pricing of the market was based on positive sentiment and not on sound analysis of company earnings and prospects for growth. The 1929 stock market crash was really a series of crashes that went on for three years. In the end the market lost 89% of its value before a recovery started. By comparison, Bitcoin lost 75% of its value in 13 months.
Staying Invested in the Market Versus the HODL Strategy
For those unfamiliar with crypto terminology, HODL stands for hold on for dear life. It refers to the strategy of staying invested in Bitcoin even when it experiences dramatic ups and downs. In regard to the stock market, if someone was fully invested in the market in early 1929 and did not sell (HODL) they were back to their previous level of wealth in purchasing power four and a half years after the market bottomed out in 1932. That same Dow Jones Industrial Average investment would be worth 39,000/41 = 951 times as much today. Over time it became clear that the total market capitalization of US stocks is tied to the value of the US economy. Folks who simply stayed invested in an ETF that tracked the S&P 500 during crashes over the years have recovered their losses and kept seeing there investments increase in value. The question for an investor is if one can expect the same long-term increase in valuation from Bitcoin.
What Assets Survive Market Crashes?
In the wake of the 1929 crash 9,000 banks failed and 86,000 companies went out of business. After the dot com crash at the turn of the century half of the dot com companies went out of business. However, Amazon.com, which sold real things, went on to become one the richest companies in the world with a market cap of nearly $2 trillion. Similarly, thousands of cryptocurrencies have failed, some spectacularly. Meanwhile, Bitcoin, Ether, and a few at the top of the heap survive and are going up in value. If you are going to stay invested in stocks or the top cryptocurrencies, you need to pick assets that are not going to disappear during a crash. Amazon.com com is a good example of picking a survivor. When any new company with dot com in its name was going up in value in the late 1990s, some sold real goods and services and some did not. In the case of cryptocurrencies, Bitcoin has set limit to how many can be mined. Ether is at the center of the developing decentralized finance world. Such assets that have reasons to exist survive crashes and come back. Now the question is which type of asset will provide the most profit and the most security over the years?
Worrying About Investments or Sleeping Well At Night
One reason that many investors diversify and put money into several different investments is to avoid an unexpected disaster. Folks who were fully invested in FTX, Voyager Digital Ltd, or Celsius Network experienced horrific losses as these crypto companies went bankrupt. Folks who diversified with assets in Bitcoin, Ether, and the S&P 500 and held on are back to all time highs. Folks who put everything into the newest, shiniest cryptocurrency in pursuit of a fast buck all too often ended up like FTX investors. Folks who jump in and out of the crypto market need to pay attention and be willing to take losses. If you just want to make some extra money you need to decide if Bitcoin and the rest are for you or maybe just open a savings account at your local bank.
Do You Know What You Are Doing or Are You Just Playing the Market?
Folks who recognized the potential profits in telephone companies, car companies, computer companies, and pharmaceutical companies generally did well over the years. These investments had and have a solid basis for putting your money in them. Ether is at the center of decentralized finance and Bitcoin is a digital asset that is not likely to go away. Such investments make sense. Unfortunately, when you watch the financial news, get tips from friends, you might think that profits are simple and easy. Today do you understand how spot Bitcoin ETFs are affecting the price of Bitcoin? A basic rule of thumb for investing is not to invest money that you will need in the short term and do not risk money that you simply cannot afford to lose. Then pick an investment that makes sense in terms of generating returns over the years or holding its value while currencies falter.
