Individual markets, such as cryptocurrencies, stocks or commodities, and the economy as a whole, experience cycles of expansion and contraction. It is like the economy is breathing. There are periods when practically everything goes up and others when almost everything goes down.
The economic crisis of 2008 took more than two years to stop hitting. The stock markets fell more than 50% in the main economies of the world. But then came 10 years of buoyant optimism.
In 2000, the Nasdaq Composite stock index fell 75%.
That big drop in the first image looks like just a hiccup in the bottom left corner of the second image. Since 2002 almost everything had been going up.
This year, the same indicator has dropped by 14%.
But now we wonder if the falls that stock markets are currently experiencing (25% so far this year), are something that will be reversed soon, or are we facing a more worrying event, like the one in 2008.
We have seen how practically all the investments in the different economic sectors have lost value since the beginning of the year.
•Netflix : -67%
•Bitcoin : -38%
•Nasdaq (index): -24%
•S&P 500 (index): -14%
And this is just a sample. Falls reach 90% in some cases.
Why do we insist so much on investing for the long term?
We might be seeing a cataclysm in the global economy more like an earthquake rather than a simple tremor. But the most important thing is that you know that everything is going to be okay. We have a bad memory, and we forget the past, but we have lived this many times before. The world will recover, without a doubt.
-In the 1970s, the oil crisis, added to the end of the Bretton Woods agreement (the end of the gold standard), and triggered a global recession. On this date, the S&P 500 (another indicator) fell 50% in one year (1973-1974), only to recover 76% in two years and 133% in four.
-In the mid-1980s, oil once again helped trigger another global crisis. This time around, the S&P 500 fell nearly 30%, only to recover 226% in 5 years.
-In 2008, the subprime crisis hit the world economy. The S&P 500 saw one of its steepest declines: -58% in just under a year and a half. 5 years later, the index had tripled its price since the low point of the crisis. Today, even considering the recent price drop, its value is more than 6 times what it was then.
Crypto crash: And in the case of Bitcoin?
Bitcoin has gone through multiple cycles in the past, and has always bounced back, with a vengeance. In fact, in history, 100% of the people who have bought and waited 4 years or more, have seen their investment grow.
History does not have to repeat itself, but it is a very good precedent.
The investment horizon is key. It is very difficult to know what will happen tomorrow. On Wall Street there are physicists and mathematicians who try and almost always fail. But as we extend the time horizon, the trend is easier to predict.
About the author
Diego Vera is the Communications Manager at Buda.com. He aims to spread the Bitcoin philosophy and looks forward to the communicational transformation we are experiencing. He is learning a little more about the crypto world every day.