There’s no other way to say this – the price of Bitcoin is volatile. The world’s most popular cryptocurrency is characterised by booms (when the price goes up) and busts (when the price falls) that have been sources of major criticism. This volatility puts many West Africans off but it is also one of the main reasons why others invest in Bitcoin, hoping to buy when the price is low and cash-in when the price is high.
This may sound like a very simple and straightforward process if you are an experienced commodities trader. However, for many, it is anything but that. Working out when to buy and when to sell or hang on to Bitcoin can be a rather complicated process to navigate.
People in West Africa buy and sell Bitcoin for a variety of reasons. When the price of Bitcoin increases, some fear they are missing out on an opportunity to make a fortune. So they start buying Bitcoin, hoping the price will continue to rise.
On the other hand, fear, uncertainty and doubt (FUD), as well as price dips also prompt many to sell because they think the price may drop even further. So they sell their Bitcoin because they don’t want to lose what they’ve already invested. Whatever your reason for investing in Bitcoin, the question of whether and when to buy, sell or hold is one that must be addressed head on.
Commit for the long term
One way to address this question is to be committed for the long-term. Committing to investing a set amount of money each month, for example, makes it easier for you to benefit from Bitcoin price averaging and limit the impact of volatility and market movements. This also means the amount of Bitcoin you acquire will vary from month to month. But, over time, you will average out and will not need to worry much about the so-called perfect time to buy or sell.
Bitcoin is sensitive to various factors
It is also worth bearing in mind that no boom or bust lasts forever. The price of Bitcoin, like any other asset class, is sensitive to a variety of factors, including the state of the global economy and statements from well-known business and tech personalities. One statement in favour of cryptocurrencies could send prices rocketing and a statement against could bring it back down.
Much of the recent volatility, for example, has been a result of the negative sentiment across all markets caused by the global geopolitical news flow. These negative sentiments have also had an impact on all asset classes. With the current uncertainty surrounding global geopolitics, many investors have placed a small amount into Bitcoin as a hedge.
New asset classes can be volatile
It is important to remember that cryptocurrencies are still relatively new as an asset class, so there will always be a higher level of volatility compared with traditional and more established forms of trading. It is also important to remember that as the benefits (especially to developing markets that are disadvantaged by traditional financial services systems) become clearer, more people and businesses will hold the coins for their utility value. This will reduce speculation which should, in turn, reduce volatility. As more countries introduce regulation and the functionality of the coins increases, this should also positively impact the stability of the price of Bitcoin.
Whatever approach you take to investing in Bitcoin, the importance of responsible investing cannot be overstated. Don’t ever invest more than what you can afford to lose and don’t believe anyone who tells you they can guarantee returns – this is usually a scam.
Spend time understanding your personal preferences and the risks associated with your investment. Once this has been done and you’ve thoroughly researched crypto, you should be well-placed to take advantage of the opportunities presented by cryptocurrencies like Bitcoin.
Owen Odia, Country Manager for Nigeria at Luno