Prices are a funny thing. If a crypto's price regularly swings between $900 and $1,000, you'll start to believe that $900 is its floor and $1,000 is its ceiling. You'll greedily buy at $900 thinking it's on sale and excitedly sell at $1,000 thinking it's gotten expensive. That's because you've subconsciously "anchored" the price of your crypto to that range. Don't do it! Price anchoring is a dangerous enemy.
Cryptocurrency is a volatile, speculative asset closer to investing in a startup or small business than a traditional stock. What that means is that the real floor is catastrophic loss and the real ceiling is wild gains.
When you're evaluating a crypto, look at its current price and calculate two values: the current price divided by 10 and the current price times 20. That's a better estimate of where things could go than just looking at its historical price levels. In practice, that means if a crypto is selling for $1,000, tell yourself that its real floor is $100 and its real ceiling is $20,000.
Why do this? Because it helps you in two key ways.
First, you won’t overreact to small price swings and panic buy or panic sell. Amateurs will excitedly buy 10% “dips," sell 20% “moons,” and brag about their skill in doing so to anyone who'll listen. Had they thought bigger and had a more patient outlook, they could have bought 50% dips and sold 5x gains instead.
Second, you’ll know how much to invest into an opportunity. If you put in $100 and it goes up 20x, that’s $2,000. Is that a lot of money to you or not? If $2,000 will make no difference in your life after taxes, then $100 wasn’t enough of an investment. On the flipside, if you put in $10,000 and it falls 90%, will that ruin your financial wellbeing? If so, you’ve put in too much. Balance those two extremes because crypto is full of people who wish they put in more and people who wish they put in less.
One of my friends always anchored the coins he owned to an astronomical sum. He’d buy a $3 coin and hold onto it with the unshakeable conviction that it “should” be $500. That conviction kept him holding and buying through years of poor returns. It also kept him from selling for much smaller gains. I told him he was crazy, but in the end, he was proven right on the price, so anchor wisely!
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