Navigating the crypto bull: lessons from past rallies and crashes

Bitcoin has experienced several bull and bear markets since launching in 2009. While investors welcome rallies because they can generate substantial gains, they must also be prepared for crashes to avoid handing their returns back to the market. This article explores what investors can learn from bitcoin’s price fluctuations so they know how to manage the current bull market and make informed decisions when a correction occurs.     

Historical Analysis of Bull Markets 

To start, let’s examine the catalysts behind some of bitcoin’s previous bull markets.

2017

Increased media coverage helped to drive global interest among retail investors in 2017 and led to the inflation of the initial coin offering (ICO) bubble. Like their namesake, crypto projects used ICOs to raise funds, selling native tokens in return for bitcoin (raising nearly $1.4 billion in 2017 alone). Another catalyst at the end of the year was the launch of bitcoin futures on major mainstream exchanges, which allowed institutional investors to access the asset class. Early demand was so high on the Chicago Board Options Exchange that its website crashed. 

2019

After the market corrected in 2018, bitcoin consolidated until March 2019. Around this time, investors noticed that it demonstrates many of the properties of a store of value- scarcity, divisibility, portability and durability. This gave rise to the narrative of bitcoin as digital gold. The timing was opportune as it coincided with the trade war between the US and China who were imposing tariffs worth billions of dollars on each other’s goods. Bitcoin benefited as investors responded to the subsequent economic uncertainty and threat to growth by shifting capital to safe haven assets. 

2020-2021

The Covid pandemic prompted central banks around the world to implement unprecedented monetary policies, such as the $800 billion worth of stimulus cheques the US government sent to low and middle-income families. While some of this money found its way into the bitcoin market, the expected rise in inflation supported the digital gold narrative. Meanwhile, institutional adoption increased, with business intelligence firm MicroStrategy buying $250 million of bitcoin in August 2020 and electric car manufacturer Tesla purchasing $1.5 billion in February 2021. 2020 was also the year decentralised finance (DeFi) gained traction, with total value locked rising from $700 million to $15 billion. 

So what can investors learn from these rallies? While speculation played a significant role in 2017, forces more traditionally associated with mainstream asset classes took over as the primary catalysts in 2019 and during the pandemic. The case for bitcoin as a store of value merits attention too- CoinShares believes it could prove more effective than gold, which would have major implications for its market capitalisation.   

Understanding Market Psychology in Downturns

A number of potential triggers can lead to a bear market, such as a recession, a bubble or geopolitical events. The effect is often amplified when investors let emotions sway their decisions:

• Herd mentality- Instead of sticking to their convictions, investors pay attention to the actions of others and sell their holdings, accelerating the downward spiral 

• External noise- Traditional and social media have a sizable influence on market sentiment, so a constant stream of bad news magnifies fear 

• Contagion- People may cut back on spending, or businesses put off investing, which can either trigger a recession or intensify an existing one 

Managing FUD 

FUD- which stands for fear, uncertainty and doubt- is a popular acronym used by the crypto community during bear markets. These emotions are commonly experienced by investors- especially when holding a volatile asset such as crypto- and can lead to knee-jerk reactions like panic selling, so learning to manage them is key. 

Fear

While there’s no guarantee a market will rebound, crashes tend to be temporary so selling only crystalises losses. That’s why taking a long-term view is important. Bitcoin is a relatively immature asset class, but several of the catalysts mentioned in the first section, particularly its status as a store of value and institutional adoption, are helping it mature. For instance, the Securities and Exchange Commission’s recent approval of spot bitcoin exchange-traded funds (ETFs) in the US is a significant milestone because it makes the asset class more accessible and further establishes its legitimacy. 

One way to manage fear is by dollar cost averaging (DCA), a strategy which involves making regular investments regardless of the market conditions. The theory is that investors buy more of an asset when price is low and less when it rises, theoretically reducing the average price paid for the holding. 

Learn more about DCA. 

Uncertainty and doubt

Careful risk management also helps investors control their emotions. Maintaining a diversified portfolio is a popular strategy because if an asset falls in value, it shouldn’t disproportionately affect overall performance. 

Research by CoinShares shows that even a small allocation to bitcoin can positively impact the returns earned by a portfolio. CoinShares tracks the ongoing performance of three model portfolios: one with a standard allocation of 60% shares and 40% bonds and the other two with 4% allocations to bitcoin and gold. The portfolio holding bitcoin generates the strongest returns, and it’s less correlated with the standard allocation than the gold portfolio. The level of volatility is also similar.  

Finally, some investors periodically sell assets during a bull run to lock in returns. This strategy minimises the financial and psychological impacts of a bear market, and it can be even more effective if a portion of the profits are reinvested when prices are low. 

Conclusion

Bitcoin has experienced several bull markets since launching in 2009. Early catalysts were more speculative in nature, but as the asset class has matured, conventional drivers have taken over, including institutional adoption, the digital gold narrative and loose monetary policies. 

However, crashes are also a part of the market cycle. Investors must understand how fear, uncertainty and doubt affect their decisions and how these emotions are amplified by factors such as herd mentality, speculation and contagion. The best way to manage emotions is to employ investment strategies like dollar cost averaging and maintain a diversified portfolio. 

Learn more about investing in crypto for the long term and diversifying a portfolio with crypto.