The epic rise and fall of crypto currencies

Remember bitcoin?  It was a hot topic in late 2017, but when its value plummeted, most people forgot about it.  You might be surprised to hear that — so far in 2019 — crypto currencies have quietly become one of the best performing asset classes in 2019. Bitcoin's value has more than doubled.

The purpose of this article is not to discuss whether bitcoin is a good investment, but rather to see what can be learned from bitcoin's meteoric rise, crash and bounce.

Successful investors keep a level head. The more passionate you are about an investment, the more biased you become.  Many bad decisions are made purely by emotion and this is particularly true when investing in a high-risk sector like  cryptocurrencies, marijuana or the initial offering of a favourite tech company.

Avoid confirmation bias whereby we seek others who will reinforce our own views, whether it be through visiting websites, watching videos or talking to like-minded investors. You need to make a concerted effort to seek opinions that differ from your own. Listening to opposing viewpoints will help keep emotions in check.  It reduces the likelihood that you will become overconfident in your investment prowess and do something foolish like betting everything you have on one investment.

There is an investment adage which suggests that when people you least expect (teenagers, taxi drivers or soccer moms) start to talk about a particular investment, it's time to sell. Looking back at the height of the crypto frenzy, that's exactly what happened. Bitcoin was front page news, it was trending on Google, YouTube and other social media platforms, and people from all walks of life were fascinated by its potential. Although few, I suspect, really understood the technology behind the new "currency."    

Bitcoin bottoming out

I decided to sell all but one of my bitcoin after I was cornered at my daughter's hockey game by a group of grandparents who wanted me to teach them how to trade crypto. That was my sign to sell which I did for just under $13,000 US a coin. I sold early as the price peaked at $20,000 US a week later before dropping to $3,000 US in late 2018.

It's currently hovering around $8,000 US.

When bitcoin bottomed out there was no fanfare, no media coverage — nobody cared. By then many of the people who bought near the top capitulated and sold their position (classic buy high and sell low behaviour). The "whales," those who owned a large amount of bitcoin, started buying again. I expect this unproven sector to continue to be very volatile for years, but now that prices have come down I'm considering dipping my toe back into the crypto waters.

Here are the rules I follow when making speculative investments:

• I'm a contrarian. I prefer to sell when most are buying, and buy when they are selling. If an investment is in the spotlight, I'm very cautious.  

• If things go well and I double my money, I take back my principal but keep the profits invested. A common mistake is to lock in profits but then re-invest into something just as risky — for example, selling crypto and then buying a startup marijuana stock. This is poor risk management.     

• Keep the bulk of your assets in low- and medium-risk investments. Diversification is the key to long-term investing success. Only wager an insignificant amount in a highly speculative investment — you must be okay losing most, if not all, of your principal if this investment doesn't do well.

This column is part of CBC's Opinion section. For more information about this section, please read our FAQ.