Bitcoin - The Gift of Volatility

Welcome to Finance Friday.

In this week’s newsletter, I want to take a look at Bitcoin. This week Bitcoin has experienced around a 20% pullback from all-time highs. Should investors be worried, or is this a golden buying opportunity?

Pullbacks are Normal

Investors don’t usually like to see the value of their assets dropping. However, such pullbacks are normal and are to be expected- even in a bull market. If you are already expecting pullbacks, they become nothing to worry about. Retired hedge fund manager Raoul Pal warns crypto investors to always be ready for large price corrections, even in a bull market when prices are generally rising.

“Volatility is Vitality”

Microstrategy executive chairman and co-founder takes the concept of pullbacks one step further when he tweeted on X (formerly Twitter):

Michael is a long-time crypto bull. I believe that what Michael means here is that the regular pullbacks give new investors a chance to enter the crypto market, giving the market energy. It also gives existing investors a chance to increase their allocation at more favourable prices. Such big opportunities are less common in the stock market.

Look at the Big Picture: Linear Scale vs Logarithmic Scale

I find it useful to look at volatile assets like Bitcoin on a logarithmic scale rather than a linear scale. Let’s look at the current situation with Bitcoin on a Linear scale first.

You can see how significant this pullback looks on a linear scale and indeed it is in dollar terms. Now, let’s look at the same pullback on a logarithmic scale and see how the perception changes.

Using a logarithmic scale the current 20% pullback does not even represent a buying opportunity for me. However, that does not mean that it shouldn’t be for you - it depends on your existing allocation and your risk tolerance. I will only consider adding to my allocation if the pullback falls towards the purple trend line.

Think about your Timescale

You will notice that I have not mentioned potential reasons for the sell-off in this newsletter. That is the job of headline writers who have to think of something to say with every price movement. I believe that nothing has fundamentally changed and any reasons suggested here today will likely be forgotten in a few weeks.

If you are investing for the long term (say 5 - 10 years), what the price does day-to-day between now and then becomes less important. Again, as long as there has not been any fundamental change in your asset you do not need to worry about short-term movements in price.

Conclusion

In conclusion, I am going to turn to another Michael Saylor quote:

Do not let short-term price movements derail your long-term strategy. In my opinion, the current price action is neither anything to worry about nor a golden buying opportunity (at least not yet).

I also view volatility as a gift for new investors t enter the crypto market. However, many investors view volatility as a reason not to enter the crypto market! 😊

What do you think will happen to Bitcoin price over the coming weeks and months?

Word of the Day: Vitality

Vitality - noun - energy and strength

Do you have any Business English questions?

Please email me and I will do my best to answer them in future newsletters.

Until Monday - have a great weekend!

Iain.

www.communicateenglish.com

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