2018 will be remembered, among other things, as the year that the inflated price of Bitcoin collapsed. If youve been holding it since its bubbly top in January, Im sure the experience will be seared into your mind forever.
But its not just Bitcoin that has plummeted. Other cryptocurrencies such as Ether, Ripple, Litecoin and Stellar have all created charts that look like a ski jump run sharply down. It looks like the entire cryptocurrency asset class has hit the skids, and Im not expecting a turnaround soon, or ever.
The averaging-down trap
Yet I can see that, with the prices lower, a true cryptocurrency believer might view these current prices as a bargain and reason that they could rise again. Some might even average down and buy more of their losing investments in cryptocurrencies, hoping to cash in on the rebound in the price that they expect. However, that would be a dangerous strategy and I recommend that you dont do it with cryptocurrencies.
One of the main reasons for avoiding the practice of averaging down is that Bitcoin and the other cryptocurrencies are not really assets at all. They wont pay you a dividend and they only rise in price if you can find someone to pay more than you paid for your holding. Meanwhile, theres no underlying business to create more value. If youre dealing in cryptocurrencies, you are purely speculating and not investing at all, in my view. So, if you are speculating, I think youre aligned with the trading end of the investing/trading continuum and could draw from established trading wisdom to help guide your buy and sell decisions.
The greatest and most successfulliving trader that I know is Mark Minervini. In his book,Trade Like a Stock Market Wizard,he said that if you average down, Your loss is still the same; you didnt gain anything except maybe a double-size loss if the stock keeps sliding. Hes talking about share prices, but the principle is the same for cryptocurrencies, too.
An investment to compound your money
Instead of averaging down, Minervini advises that you cut losses as quickly as possible by selling. So thats what Id do now. Id bung Bitcoin along with any other cryptocurrency that I was still holding. It may seem like the horse has already bolted and that the time to have sold was earlier in the year, and I admit that selling earlier would have been better. But Bitcoin could easily fall 95% or more from where it is now, which would wipe out any funds you might have left in it.
Theres an old stock market adage that says you dont have to win it back the way you lost it. Instead of waiting for Bitcoin to go up again, which might never happen, Id switch my funds into something better. And I think theres a big opportunity now with the FTSE 100 share index of the UKs largest public companies. The index has been weak, but Im bullish on itfor the long term. An accumulation fund that automatically reinvests dividends back in could set you on the road to compounding your money and Id go for something like the Vanguard FTSE 100 Index Unit Trust Accumulation.
