What The Bitcoin Crash Can Remind Us About Risk (And How To Avoid It)
Before turning to stocks this week, I want to address something that is likely on many of your minds…
I know some of you are probably thinking, “Cryptocurrencies? AGAIN?”
And the answer is yes, cryptocurrencies again. Because even though cryptocurrencies aren’t exactly what we do over at my premium advisories, the simple fact is, many of you follow them. And this week’s crash in Bitcoin attracted even more interest in the asset.
Standard technical tools can work well in crypto markets, as the chart below of Bitcoin shows.
Earlier this week, it was simple enough to develop a price target based on the pattern highlighted in the chart. Technical indicators and charts have worked well for these markets because they are based solely on emotion, as there really isn’t a fundamental value for Bitcoin. Because technical patterns only represent buying and selling, they are a perfect picture of emotion.
You see, stocks and other assets have fundamental value, which can factor into whether their price moves up or down. This fundamental value is affected by things like revenue, earnings, future growth, return on equity, profit margins — basically anything that can affect the asset’s potential for future growth.
Currently, those values are stretched for many stocks. For many other assets, like bonds or real estate, those values are distorted because of Federal Reserve policies that have lowered interest rates so much. If inflation rises, those markets could suffer crashes as well.
And that brings me to how this news about Bitcoin affects income traders. You see, Bitcoin’s crash confirms that traders are nervous. There could be rapid selling. But there could also be rapid recoveries.
Bitcoin is up more than 40% after falling more than 30% in one day. But even after the recovery, it’s still more than 30% below its high.
How I’m Trading Right Now
That’s a lot of numbers, so now let me put it all together. There will be volatility at times. This is especially true for Bitcoin, where the volatility can be extreme. But it will also be possible to see large losses in other assets (though the declines are likely to be smaller and more prolonged).
This point is that this is a high-risk environment. And I will be playing things with extra caution. The last thing anyone wants is to endure losses of 50% or more.
That’s why I’m turning to strategies like the one we use over at Maximum Income.
For those who may be unfamiliar, this the trading technique we use allows us to make immediate income from stocks we hold in our portfolio.
For example, one of our recent trades was in Amphenol Corporation (NYSE: APH).
This is a company that makes connectors. It’s not the kind of company you hear people talk about every day, but it’s products (connectors used on circuit boards) are everywhere. In fact, you may have its products in your home and not even know it.
It also makes electrical connectors and other small parts that are found in electronics equipment, computers, cars, and almost everything else.
APH could be considered a “recovery” trade because consumers and businesses will be buying products from the companies that APH supplies. It’s a bullish picture for the company given that there are trillions of dollars in excess savings that will be spent on new items that include Amphenol components.
The company has been reporting all-time highs in sales and earnings. Backlogs in orders point to continued strength, and APH has been buying smaller competitors to meet demand.
But rather than simply buying the stock and holding, we made a trade that could generate 19% in annualized income — and that’s if the stock itself goes nowhere.
Action To Take
I believe strategies like this offer a much better risk/reward setup than what most investors are doing in this market.
Right now, many traders are taking on excessive amounts of risk — whether it’s in bitcoin or speculative stocks or simply overvalued stocks. Don’t let that be you. It’s possible to generate a good return on your capital without risking your hard-earned money.
And that’s why strategies like this are so important to learn — especially if you value income.
If you’d like to learn more, then my latest presentation explains how this strategy can work for you.