Why do we struggle with long term investing, especially when it comes to cryptocurrency?

Investing for the long term is something that people struggle with, especially when it comes to the cryptocurrency, but why is this?

The reality is investing really shouldn't be that difficult, but it is often made out to be a lot harder than it need be; but why? Simply put it is because of the way we are as human beings. Firstly we have an innate tendency to rely on intuition.

As humans we naturally think, but we also lean heavily on intuition and instinct.

When we act intuitively or instinctively we are reacting without even questioning our decision; we simply know what we like or what we want. But when it comes to financial decisions this behaviour really doesn't help us. When making these types of decisions you need to be in a mode of being able to think and think rationally.

Also, when it comes to investing we need to have a long term time horizon in mind. Unfortunately many people ignore what might be in the distant future and place too much emphasis on the here and now.

In the field of behavioural finance this is known as “present bias." This is the tendency to rather settle for a smaller present reward than to wait for a larger future reward, in a trade-off situation. This describes the trend of giving too much meaning to immediate rewards, while putting less worth in long-term consequences.

Therefore, when it comes to events that happen in the long-term, we don’t plan for them sufficiently because we don’t see them as sufficiently close.

Personal responsibility

In the traditional world of finance when someone sets up an investment account it is typically done under the guidance of a third party advisor who then oversees the management of the account that is held in custody by a financial institution, over a period of time. There is no personal responsibility when it comes to any decisions that are made.

In the world of cryptocurrency however anyone has the opportunity to set up their own investment account, but invariably this is done by the individual who is then personally responsible for its management. Although this may take discipline and a different kind of mindset, in a world where civil liberties and freedom has been slowly eroding the idea of having complete control and sovereignty over one's assets should actually be seen as liberating and quite empowering.

By virtue of the fact that people have control over their assets can mean that it is possible that they become a danger to themselves. Perhaps they don't do their research; or they don't have a clear plan in place; or they get greedy; or they simply listen blindly to the wrong advice. At the end of the day you have to be prepared to put your big boy (or girl) pants on and accept that you will take the responsibility head on. This might seem daunting, but it really shouldn't be, especially if you are invested for the long term.

Market Volatility

Volatility in financial markets refers to changes in the price of an asset. It can be healthy, with steady increases or decreases in price within a general range. It can also be extreme, with sudden price movements in either direction. Healthy volatility serves many purposes in a market, but it mainly creates opportunities for profit. Extreme volatility occurs when an asset’s price changes rapidly within a short period of time.

Most observers of cryptocurrency markets would agree that crypto volatility is in a different league altogether and this can be unsettling for the average investor, especially one who has a short term perspective.

If you look through the historical price charts you will see that skyrocketing peaks and depressive troughs occur at a quicker and more extreme pace in crypto prices compared to prices of assets in the traditional markets.

Although the crypto market is maturing it is still regarded as a somewhat speculative space, in fact the harsh reality is that many of the smaller projects are destined to simply disappear over time, which is why research and a plan is so important.

The bigger more established coins such as Bitcoin have however proven themselves over successive volatile market cycles and there is no reason to believe that this will change in the years ahead.

Consider Bitcoin, in 2016, the price increased 125% and then in 2017 the price rose again, but this time by more than 2,000%. After the 2017 peak was reached where it hit new all-time highs, Bitcoin’s price fell once more, by over 80%. Fast forward to this year, Bitcoin continued to set new all-time highs, going up more than 300% from the peak price that Bitcoin achieved during the 2017 bull market.

So even when you factor in the extreme volatility Bitcoin has still managed to achieve an average annualized return of 173%. What other asset class can boast such price performance?

Train yourself to focus on the long-term

Crypto investors have a habit of focusing on the day to day price movements and that can become extremely emotional, especially if the asset is decreasing in price. If you have a strong fundamental belief in what you are invested in zoom out and look at the bigger picture.

Consider the crypto investors in 2013 who bought Bitcoin at a price of around $170 and then saw their investment drop to $75 and subsequently let their emotions get the better of them and sold; how do you think they are feeling today with the price now at over $50,000?

Financial markets are a device for transferring money from the impatient to the patient - Warren Buffet

The key is to try and train yourself to focus on the long-term. That way, investing is far less risky than many might assume.

Essentially, the more you distance yourself from these sorts of unhelpful emotions, the better you can invest consistently and robustly for the long-term.

The outsized increases and decreases in price, especially in the crypto market, can be overwhelming, which is why a clear plan and good research is essential to long term success as well.

All of this sounds simple. But, in practice, it often isn’t especially when you are in control of the decisions and handling human emotions. Some people get the hang of it, but then, for whatever reason, lose their way. But just remember, conviction really is a super power, so stick to your plan, think in terms of years and definitely not months and in the end you will be rewarded.

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I'm Paul

I am on a mission to help people start a journey to financial freedom. The key to long term success is education and understanding the incredible opportunity that exists right now.

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