Yesterday, Bitcoin crashed. Again. If you’re new to crypto, this event is similar with a stock market crash. The price goes down very fast, triggering all sorts of mechanisms which only add to the velocity. The end result: about $2.6 billions wiped out in account liquidations. In simpler words: people who trusted the price will go up and placed bets on that direction, on leveraged accounts (borrowed money) got triggered by the move down, and they lost not only their bet, but all they had in their trading accounts. In total, $2.6 billions were lost.
I just mentioned those numbers to give you a bit of a context. It could have been about stock markets, or some sort of micro Lehman Brothers event, like we have plenty these days.
The idea is that, every once in a while, markets make these huge, unpredictable moves. And when this happens, you may be caught off guard. You may be even one of these guys that lose huge amounts of money – although I hope, for your own financial stability, that you manage your risk better, and don’t do margin trading – or trade more than you can afford to comfortably loose.
The first reaction when one of these moves happens is to run away. Somehow. It’s just one of the 3 natural reactions in face of danger: fight, flight or freeze. In technical terms, this translates to selling. You want to limit your losses, to give away the hot potato from your hands. It’s called panic selling.
I don’t think this is a good idea, and here’s why.
Any investment strategy should have an exit plan. You can’t come up with an improvised, with an “on the spot” exit plan. That’s not how it works. Every time you invest in something, you would be in a much better position if you could clearly visualize the end of that investment, in both directions. In the direction where it comes to fruition, and in the direction where it goes to dust. And you should strive to prepare equally for both.
Alas, we’re skewed towards optimism and we move forward hoping nothing will go wrong. We expect to place only good bets. That’s statistically impossible. We are bound to lose at some point. That’s just the way it is.
The key is to know what to do when this happens, not to hope it won’t happen.
And, most of the time, when some of your investments (being them financial or emotional) doesn’t work out, we should just stop. Do nothing. Don’t even think about doing something. Sit still like a log. Wait for the storm to pass. Wait for the market to stop moving down, or, if it’s an emotional investment, wait for the other person to finish whatever triggered us (most likely leaving, somehow). It’s difficult, I know. But it’s the only (clean) way out. Any other option will create even more damage. So, just sit still for a while.
And when the event consumed completely, look up that exit plant. Act accordingly. Don’t steer away an inch from it, don’t improvise. You may think you have better judgment in the midst of an action, but that’s an illusion, it’s just the adrenaline talking. You most likely had a clearer head when you planned ahead. So, stick to the plan. Which, and I come back to this, means you need to have an exit plan before engaging in.
As you practice this over and over, you will reach to a level where you will start to understand the meaning of the words “emotional stability”. Most likely you will not reach the level of complete emotional stability, because that will make you a robot, which is boring as fuck, but at least you’ll understand what to do when the shit hits the fan.