Unpopular Opinion: Don’t HODL!!! Sell Your Crypto Before The End of The Bull Market.
Here’s why you should sell your crypto, before the end of the bull market to prevent losses
You shouldn’t HODL. There, I said it. While crypto influencers have branded it as a noble ideal to HODL (hold) your crypto, HODLing will probably cost you when the Bear market comes — and that Lambo you always wanted.
Instead, I will show you a few research articles by reputable financial analysts and explain why HODLing is bad for you when the Bear market comes. This will be jam-packed with Finance knowledge, but the key points will be bolded.
Price shock permanence
Downward price shocks in Bitcoin are permanent, or at least they last a long time.
Iltas, Y., et.al (2020) performed a unit root test on Bitcoin. Their test indicated that shocks in Bitcoin’s prices are permanent. Prices did not return to their mean after shocks for a long while.
The table below shows the results of the unit root test, indicating that BTC price is non-stationary.
If you don’t understand that, no worries. Simply put, all that means is that a sudden dump in BTC prices is likely to keep prices low for a long time. In fact, after the crypto bull market in 2018, crypto prices had a massive sell-off and remained ridiculously low for two years as seen in the graph below.
Image credits: Coin Telegraph
If investors had not sold at the end of the bull market, their unrealised losses would have been sitting there for 2 years. In fact, the current price of BTC is only ~2x the ATH in 2018. You would be better off investing in TSLA stock.
Price overreaction in the crypto market
In the ideal world where everyone owns a Lambo, the markets are also efficient. That means that in a perfect world, the prices of crypto and stocks reflect the actual value they provide — that is they are efficient.
The graph below shows two scenarios: efficient response (green), and overreaction (red).
Image Credits: Dr Khairul Anuar
Efficient responses reflect the actual value of the asset. In the case of bad news, the asset should dip in price up to the equivalent value of the information. However, overreactions tend to inflate the magnitude of the bad news, as seen in the red line above.
So the million-dollar question is this: is the crypto market efficient or over-reactive?
Cryptocurrency markets are extremely overreactive. In fact, Bogards, O., Czudaj, R L., (2020) suggest that overreaction to bad news is much more prevalent than an overreaction to good news in crypto markets.
To prove that the crypto market overreacts, a trading strategy was performed to buy the asset at the bottom of the overreaction to bad news, and sell the asset once the price has risen back to its true value.
The table above shows that this strategy consistently makes positive returns; meaning that the crypto market indeed overreacts to bad news.
All these just means that a price drop in the crypto market will cause the price to dip way more than it actually should be. Deciding to HODL your crypto at the start of the Bear market may not be the best move. A rational investor should sell at the start of the Bear market.
However, because the market overreacts, this also means that if you find yourself in the middle of the Bear market, DONT PANIC SELL.
Instead, consider HODLing until the market recovers into its fair value/correct price level. You can decide whether to sell after.
Opportunity Costs of HODLing
You may not feel it directly, but a HODLer from 2018 incurs costs: namely opportunity cost.
Opportunity cost is the benefit you have forgone because you chose another option. In this scenario, an investor could have sold off $10,000 of their BTC and purchased Tesla stocks in 2018. If the investor had done this, their current portfolio from that 10k would be worth $136,000 today.
The opportunity cost would, therefore, be 136k-10k = 126k.
Anchoring Bias
Lastly, anchoring bias is another reason why you shouldn't simply hold your asset. Anchoring bias says that people tend to make a decision because previous experience has influenced them to do so.
For instance, if you held your crypto from 2020, you would probably have a chunky portfolio right now. Anchoring bias is when you think that your past successes assure you of your future success. A bullish market in 2020–2021 does not assure us of a bullish market in 2022.
Conclusion
While HODLing your asset could have helped you in a bull market, bear markets will often break people. That is why you might consider selling your assets at the start of the bear market instead of HODLing.
In summary, Crypto markets tend to dump for a long time and dump much harder than efficient. Moreover, opportunity costs and anchoring biases should be lowered by the investor in order to make good financial decisions.
To prepare for the market crash, consider reading this article here.
This article is simply educational content and not meant as financial advice. Please perform your own research before making any investment decisions.
This article was written for Fortune Coin (FOC).
References
Borgards, O., & Czudaj, R. L. (2020). The prevalence of price overreactions in the cryptocurrency market. Journal of International Financial Markets, Institutions and Money, 65, 101194. https://doi.org/10.1016/j.intfin.2020.101194
Iltas, Y., Ucler, G., & Bulut, U. (2019). Assessment of the crypto market efficiency: Empirical evidence from unit root tests with different approximations. Contributions to Economics, 191–200. https://doi.org/10.1007/978-3-030-25275-5_10
