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My mistake: Bitcoin, inflation & money printing

This post covers:

  • My mistake in 2020/21 with understanding the financial markets and how they affect crypto
  • Specifically around central bank money printing and interest rates
  • How inflation led to policy change
  • Lessons learned

Setting the stage

Since 2008 we’ve had low central bank rates of interest. This was, presumably, a short term measure in order to incentivize borrowing and stimulate the economy after the “Great Financial Crash” (GFC).

These low rates of interest have led to a LONG bull market.

Then, in 2020, we had a stock market crash due to Covid fears.

At the same time, Crypto prices crashed.

In response to this, central banks, in particular the Federal Reserve (FED) decided to print money to stimulate the economy.

If they could have lowered interest rates, they would have, but they were already close to zero.

They bought bonds with magically created money. This meant that bond holders were now holding cash, and needed to spend it on something.

The idea was that their spending would stimulate the economy.

It’s not clear whether or not it stimulated the economy, but it did result in an almighty rise in the price of stocks:

Then, in early 2022, there was an announcement from the FED that they were going to start raising interest rates.

Before they had even made a single raise, the markets reacted, and prices started dumping from their all time highs.

Then, as time went on in 2022, and the interest rate hikes came to pass, the stock market gradually dipped further.

If the market corrections in stocks were sharp, they were even sharper in crypto:

From all time highs of $60k+ in 2021, the price is now down to $20k, and threatening to go lower.

My Mistakes

Like many tech savvy younger people, I had put a small amount of money into Bitcoin as a speculative asset.

I was very pleased to see the price go so high in 2021.

It got me daydreaming about buying an actual house and no longer having to rent.

This lead me to making at least 5 mistakes:

  1. I heard the discussion of Bitcoin as a hedge against fiat inflation, and believed it.
  2. I got greedy when the price was up at $60k and wanted/waited for it to go higher.
  3. I mistook the rises in price as something kind of “real”, as opposed to an outcome of excess money sloshing around in the system.
  4. I didn’t take any chips off the table, so to speak, while the price was high. That’s another way of saying I didn’t sell any.
  5. I didn’t anticipate how quickly the price would crash once interest rate increases were forcasted by the Federal Reserve.

I guess if your day to day work isn’t in the financial markets, and you’re reliant upon sources like the internet, it’s possible to mis-read things.

Possibly if I’d worked in banking, or had friends in the sector, I might have heard things like:

  • There’s a LOT of leverage at the moment
  • This bubble isn’t going to last
  • This bubble will pop the moment the FED signals to increase interest rates

Unfortunately I don’t, and didn’t, and was only really getting my head around the events post-hoc (after they happened).

Which leads me to now, where I’m putting together this post to re-cap the events that happened and try to learn from them for the future.

The image above shows what I should have been doing (source).

However, what I did was… nothing.

Prices went up and prices went down again, without taking advantage of them.

Whilst there’s nothing wrong with buying and holding, when you’re working to a long timeline.

When you have immediate real world needs, such as buying a first home to set things up to have a family, I would say in retrospect it’s a very bad move.

Takeaways

There are a few things I can takeaway from this experience:

  1. Be prepared to take some chips off the table when there are significant gains and they can make a material difference to your life
  2. Now you know how markets react when the FED is intervening. Low interest rates and money printing (bond buying) make the markets go UP. Raising interest rates and lowering money printing (less bond buying) makes the market go DOWN.
  3. The markets often react based on information, rather than when the actual event happens. E.g. announcement of interest rate hikes can crash the market.

The reality is, we can’t go back. We can’t change the past. We can only learn from it, and bring those lessons into the future.

The Short Term Future

So where do things go from here?

In the short term it looks like:

  • Interest rates are going to keep rising, it seems, as long as the inflation rates continue to stay high.
  • Stock and crypto markets may continue to falter.
  • There will be a “bottom”, although it’s hard to tell where that will be.
  • Perhaps at some point in 2023 there will be some more money printing, but that’s uncertain. It won’t happen in the short term whilst inflation is high.

My Strategy

For now, I have sold a small amount, to make sure that I have some cash available, should things crash further.

Longer term, I still believe in the future potential of crypto, so I will try and pick up some more Bitcoin whilst it is at these lower values.

Lastly, I will try and offload some if the price goes higher again. Which could be a long time from now.

 

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