What’s Behind Bitcoin’s January Sell-Off

By Nick Rokke, analyst, The Palm Beach Daily

• “Will Bitcoin ever rebound?”

• “Bitcoin Price Crashes as it’s Branded a ‘Failed Experiment’”

• “Bitcoin price falls by 20% in dramatic crash”

• “Is This the Beginning of the End of the Bitcoin Bubble?”

You might think that all these headlines were from last week.

If you do, you’re wrong.

The first is from a January 15, 2015 CNN article. The second from the January 15, 2016 edition of Newsweek. The third from the January 5, 2017 issue of The Daily Telegraph.

Only the last one is from 2018 (the January 16 edition of The Atlantic).

Bitcoin has had a wild ride to start the year. Last week, it fell over 20% in less than 24 hours. And it’s down nearly 40% from its December high.

Every time bitcoin crashes, the mainstream media writes it off. In fact, bitcoin has been declared dead so many times that we’ve lost count.

By now, regular readers should be familiar with bitcoin’s volatile swings. But we know they can be emotionally jarring. That’s why at the Daily, we preach staying rational… especially when the markets turn against you.

We remain firm believers in bitcoin. Despite the recent crash, we’re still up 2,597% since recommending the cryptocurrency in April 2016. And if you follow our plan and position-size correctly, you can ride out these storms.

Today, I’m going to put this recent drop into perspective… and hopefully keep you from deviating from your investment plan.

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Bitcoin’s January Effect

As I mentioned above, bitcoin is down almost 40% from its December high. That makes it the fourth year in a row that bitcoin has crashed in January.

Over the past three years, bitcoin has pulled back an average of 30% in January. But after stumbling at the start of the previous years, it’s bounced back each time…

Here’s my theory: Bitcoin investors were waiting until January to sell so they could delay paying taxes on their profits until the following year.

I wrote about this last November…

Every time we sell an investment, there’s a tax consequence. If you have a gain, you owe money. If you have a loss, you might be able to write those losses off. And you can use the offsetting losses to your benefit.

Selling your losers in December can offset your tax liabilities the following year. But if you want to delay paying taxes on your winners another full year, you can sell them in January.

This may be the case with bitcoin.

Or maybe it’s just a coincidence. We’ll never know for sure. What we do know is that, just like before, bitcoin quickly regained those losses.

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Stick to Your Plan

No one likes seeing an investment plummet over 30% in a week… You feel a knot growing in your stomach… you get light-headed… and just want the pain to stop.

Emotions take over and you click the sell button.

But that’s usually right near the bottom. And the people who did that last week appear to have sold at the bottom. That would have been the irrational thing to do.

We’ve sat through bigger dips before. Just last summer, the entire cryptocurrency market dropped 50%. But after that harrowing drop, almost all cryptocurrencies went on to make new highs the rest of the year.

If you can’t stomach this volatility, it probably means you have too much invested in cryptocurrencies. If you do, then you need to follow our cryptocurrency investing plan:

• Allocate no more than 2–5% of your investable assets to cryptocurrencies. They’re smart speculations, so don’t bet the farm on them.

• Position-size properly. If you have a smaller account, that means no more than $200–400 per position; and for larger accounts, $500–1,000 per position.

• Diversify. Don’t put all your eggs in one basket. Invest in several quality positions.

Hang on to your bitcoin. We believe the dip is temporary… just like it was in the past three years.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. How do you cope with cryptocurrency volatility? Tell us your action plan right here.

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