Taking advantage of a falling market: the perspective of a long-term investor

Markets move in regular, repeated cycles. All the previous downturns of the U.S. stock market, such as the Great Depression of the 1930s, the technology market crash of the 2000s, and the financial crisis in 2008, have been followed by extended bull markets, beating the all-time highs.

Similarly, in 2014, Bitcoin experienced a significant price decline of 80%, after which it entered its longest running bull market in the history of cryptocurrencies — increasing by an astonishing 9,000% over the following two years.

The biggest mistake that most investors make is to make judgments about the future of a market by extrapolating the most recent experience and underestimating the risk of events that have not occurred in a while. So if a market has gone up a lot, investors think that it’s a good market and buy at a high price, rather than think that it’s too expensive and may soon plummet.

Conversely, when the market goes down a lot, investors draw the conclusion that it is a bad market and close their long positions at the lowest price – rather than realizing it could be the ideal time to buy.

Without understanding how market cycles repeat, many investors find themselves buying stocks at their most expensive prices on market confidence and selling stocks at their lowest prices out of fear the market will fall further.

Cognition biases, such as overconfidence and short memory, induce investors to be overconfident and make suboptimal decisions, which lead to losses. Instead, investors should develop an awareness of the cycles and avoid following a herd mentality. Thinking of business cycles (and market cycles) as fluctuations around the linear trend growth of an economy is a sound long-term framework for making investment decisions.

Now, let’s take a look at a long-term trend in Bitcoin price encompassing the last 8 years. As at December 2018, the price of Bitcoin has declined by 79% from its all-time high. If we apply the long-term perspective of mean-reversion strategy and estimate the long-term trendline over the past 8 years, we can see that now is a good time to enter the market at a very cheap (bargain) price. Assuming that the historical pattern of growth rates and volatility will be repeated over the next growth cycle, long-term investors will realize a return in a range from 800% to 3,500%.

This analytical approach suggests that now is the time when smart money from long-term investors is entering the market – and could very well be the ideal time to buy.

About the author: Alex Nekritin is a trading veteran with 15+ years experience in currency and commodity brokerage space. He is the Managing Director of Monfex, a soon to launch trading platform that will offer perpetual futures on top cryptocurrencies. He is the author of Naked Forex: High Probability Techniques for Trading without Indicators and a number of opinion pieces including How Cryptocurrency Exchanges Work).