2018 will be remembered, among other things, as the year that the inflated price of Bitcoin collapsed. If you’ve been holding it since its bubbly top in January, I’m sure the experience will be seared into your mind forever.
But it’s 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 I’m 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 don’t 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 won’t 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, there’s no underlying business to create more value. If you’re dealing in cryptocurrencies, you are purely speculating and not investing at all, in my view. So, if you are speculating, I think you’re 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 successful living 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 didn’t gain anything except maybe a double-size loss if the stock keeps sliding.” He’s 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 that’s what I’d do now. I’d 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.
There’s an old stock market adage that says ‘you don’t have to win it back the way you lost it’. Instead of waiting for Bitcoin to go up again, which might never happen, I’d switch my funds into something better. And I think there’s a big opportunity now with the FTSE 100 share index of the UK’s largest public companies. The index has been weak, but I’m bullish on it for the long term. An accumulation fund that automatically reinvests dividends back in could set you on the road to compounding your money and I’d go for something like the Vanguard FTSE 100 Index Unit Trust – Accumulation.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.