Sitting on my hands through a correction
So I would add some thoughts to the fun and games yesterday. After Bitcoin's massive run up to $2,800, it dropped over $400 in the space of an hour. This had a knock on effect with other coins where at one point the market turned red.
At one point my entire portfolio dropped over £25k, that is a big fucking kick in the teeth. I won't lie, I have been through many crashes, but this one made me a little nervous. Still no reaction, and while the market spent the rest of the day bouncing up and down, everything seems to have settled down.
So, what causes a crash? The most likely scenario is some large whale traders taking profits. There are some people out there sat on massive volumes of Bitcoin. When a significant sale goes through it can drop the price, this, in turn, can cause some traders position to activate what is called a stop loss. A stop loss is where, on an exchange, you set your position to automatically sell if a position is hit. This further forces the price down and leads to panic sales and so on. You can see the pattern.
There is also the potential of market manipulation in place. Some people may be holding a large short position, force a big sale which drives the prices down and then rebuying the dip. Here they win three times:
- They profit from the sale of their holding they sell
- They profit on their short position when the price drops
- They profit from buying the dip
As ever though, my strategy is to hold, and once the market has settled, I hadn't lost too much by the end of the day, and my portfolio is in the same place it was three days ago.
One interesting thing to note is where prices moved. I have mentioned before I keep my coins partitioned into two pots:
- Hold account (the biggest coins)
- Trading account (the smaller coins I take a punt on)
While my hold account was down, my trading account was up. I read two things into this. Firstly this reinforces my view that the price drop was profit taking. Secondly, experienced retail traders are used to the volatility, as such there was less panic within the smaller coins, which are mainly dominated by experienced retail traders.
If you went on Reddit or followed the Trollbox on Poloniex, then you could see people shouting that the bubble had burst. Nope, this was merely a correction after a meteoric week with traders taking profit. Yes, the bubble could still burst, if we ever are in a bubble. This is something nobody knows.
Anyway, as ever I am sat on my hands. Let's see what happens today.