Bitcoin experienced a significant 30% drop last week, and if you’re feeling uneasy, you’re not alone. It was a nerve-wracking weekend for many crypto investors. 🤨
A Rollercoaster Weekend
For many, this past weekend’s market behaviour felt catastrophic. The dramatic drop left many questioning their investment choices, experiencing that sinking feeling in the pit of their stomachs. But let’s put this into perspective.
Understanding Bear and Bull Markets
In finance, you often hear the terms “bear market” and “bull market” thrown around. But what do they mean?
Bear Market
A bear market refers to a period where prices of assets, such as stocks or cryptocurrencies, are falling or expected to fall. It’s characterized by widespread pessimism and negative investor sentiment. Think of a bear swiping its paws downward—prices are going down. During bear markets, you might see 20% or more declines from recent highs, which can last for months or even years. Investors tend to be cautious, often selling off assets to avoid further losses.
Bull Market
Conversely, a bull market is when asset prices are rising or expected to rise. This market is marked by optimism, investor confidence, and expectations that strong results will continue. Imagine a bull charging forward and upward with its horns—prices are increasing. In a bull market, you typically see prices increase by 20% or more over a sustained period, often leading to higher returns for actively buying investors.
Understanding these terms helps investors decide when to buy, hold, or sell their investments based on market trends.
Understanding the Crypto Rollercoaster
The world of cryptocurrency is notoriously volatile. Think of it as a wild rodeo ride, where 70-90% pullbacks during bear markets are not uncommon. It’s like dealing with a hangover after a wild night out—intense and painful. But quick and sharp pullbacks are simply part of the game even during bull markets.
You must accept the volatility to navigate these waves and aim for those sweet gains. The key to surviving these market jolts is to zoom out and look at the bigger picture.
Keep Calm and Zoom Out
When your portfolio dives, take a step back and remember: these swings are as normal as your morning coffee.
The Psychology of Fear and FOMO
Why do people often fear investing when crypto drops and tend to buy when it’s high? It’s all about psychology.
Fear During Drops: The Pain of Loss
- Loss Aversion: People are inherently more sensitive to losses than to gains. This principle, known as loss aversion, suggests that the pain of losing money is psychologically twice as powerful as the pleasure of gaining the same amount. When crypto prices drop, the fear of losing more can paralyze investors, causing them to sell off their assets to avoid further losses.
- Uncertainty and Doubt: During a market downturn, negative news and pessimistic forecasts dominate the headlines, amplifying feelings of uncertainty and doubt. This creates a feedback loop where fear breeds more fear, leading to panic selling.
- Herd Mentality: Seeing others sell their investments can trigger a herd mentality. People tend to follow the crowd, especially in uncertain situations, fearing that others might know something they don’t. This can lead to mass selling and further price drops.
Buying During Highs: The Lure of FOMO
- Fear of Missing Out (FOMO): When cryptocurrency prices are soaring, the fear of missing out becomes a powerful motivator. Investors see others making significant profits and fear that if they don’t buy now, they’ll miss the opportunity to benefit from the rising prices.
- Confirmation Bias: Positive news and success stories are prevalent during a bull market. This confirmation bias, where people favour information that confirms their preexisting beliefs, reinforces the idea that prices will continue to rise, encouraging more buying.
- Social Proof: Success stories and endorsements from influential figures can create social proof, convincing people that investing in rising markets is a wise choice. This psychological phenomenon makes people more likely to invest when they see others doing the same.
- Overconfidence: As prices rise, investors often become overconfident, believing they can predict market movements and that the upward trend will continue indefinitely. This overconfidence can lead to risky investments at inflated prices.
A Historical Perspective
Let’s hop into our time machine and revisit some of the biggest drops from previous bull markets.
1. The 2011-2013 Bull Market
In 2013, when Bitcoin was still in its early days, the market saw a dramatic dip of 82%! It was a tough time for investors. But hold on—Bitcoin then skyrocketed 15x before the end of the year.
Early adopters who believed in the technology and its potential held on tight during this period, enduring the volatility. Their patience paid off tremendously.
2. The 2015-2017 Bull Market
In 2015 and 2016, Bitcoin experienced three significant dips: a 37% sell-off, a 41% nosedive, and another 40% drop. 📉
2017 wasn’t any easier, with four pullbacks of at least 30%. Many investors sold in fear, only to buy back at higher prices. However, those who held from 2015 to the end of 2017 saw Bitcoin climb from around $300 to almost $20,000—a staggering 66x return.
Imagine holding onto an asset through such dramatic fluctuations and then witnessing such a massive return. It required nerves of steel and a firm belief in Bitcoin’s future.
3. The 2019-2021 Bull Market
Still not convinced? Let’s look at another epic run. Between July 2019 and March 2020, Bitcoin faced 53% and 63% corrections. Just months later, Bitcoin began its rise from $4,000 to $69,000, showcasing serious gains by holding through the pullbacks.
Interestingly, the chart from 2020 looks eerily similar to the trends in 2024: a long, drawn-out pullback, a recovery, and then another sharp drop. Bitcoin ended up doing a 17x from its low last time. What will happen this time around? 👀
The Bottom Line
History shows that holding through these pullbacks—or even adding to your investment if you can—almost always pays off during bull runs. So, next time you find yourself fretting over a market drop, remember the bigger picture and keep your eyes on the long-term gains.
source: Milk Road