By Jack Forehand, CFA (@practicalquant) —

I am unfortunately not one of the people who has enjoyed the two thousand plus percent return of BitCoin this year. I have spent a lot of time studying it, and in hindsight I certainly wish I had bought it when I began that research process, but as a disciplined (at least most of the time) value investor who runs fundamental based investment strategies for a day job, I am just not wired that way. I feel like I really need understand an investment, and the “why” behind it before investing. That has served me well historically, but can also prevent me from getting into rapidly appreciating assets like this.

For those who do own cryptoassets, congratulations. You are likely sitting on gains that typically occur once in a lifetime and you should be commended for taking the risk, seeing the potential for this asset class early on, and getting involved. That can be a difficult thing to do, especially in the early innings of any emergent technology or asset.

Bitcoin performance from 12/13/2016-12/13/2017

Source: Coinbase.com

But the big question is what to do now.

I have never seen a wider range of views of the future than currently exist with cryptoassets. Many leaders in traditional finance have publicly said that all of this ends up going to zero. Others in the technology space think that we are only seeing the beginning and these assets may go up another 20 times their current price.

I won’t touch that debate, since I don’t know enough to have an informed opinion. Despite spending many hours studying this, I am only in the beginning of my learning process. But I think there are some general lessons about investing that anyone who has benefitted from the rapid rise in cryptoassets (and even people who haven’t) can learn from what has gone on here that will help maintain and build their wealth going forward.

1) You Aren’t as Smart as You Think

Overconfidence is a very common problem among people who generate huge returns on a specific investment. After people do it one time, they tend to think they can do it again, and that gets them into trouble. This doesn’t mean that people who invested in cryptoassets haven’t made a smart and profitable decision. Given the returns, clearly they have. Whether that decision was the result of skill or luck or a combination of both, it has definitely worked out well.

The problem typically arises, however, in the future when investors believe those gains make them smarter than the market. And often that leads to an even bigger bet being placed the second time as an investor’s confidence rises. In many cases, this is a bad idea.

Before you add money to your crypto holdings or take your profits and move on to your next investment, it is very important to have an honest discussion with yourself about how much of what you have made was the result of luck and how much was the result of skill. And if it is skill, it is important to consider whether that skill would translate to other potential future investments outside this space. Admitting some or all of it is luck in no way takes away from the profits you have made. That money is still in your pocket and isn’t worth any less in that case. It is more about trying to not offset something great you have done in the past with mistakes in the future. Overconfidence has a tendency to do that to people. So be careful going forward and be honest with yourself about what you do and don’t know, and it should help you preserve what you have made here and hopefully compound it with further future gains.

2) Staying the Course Through Volatility is Key to Investment Success

One of the best things many people who own cryptoassets have done is to research and understand the space both before and after investing. Investing in these digital assets has caused many investors to dig into the technology behind each one to try to understand the value or utility that they may offer. This has allowed them to appreciate both the risk and potential return.

The people I know who have invested in cryptoassets have typically invested a small portion of their portfolios in them and understood going in that they may lose their entire investment. Setting the proper expectations in advance like that is a great recipe for good decision making because you won’t be caught off guard. When you understand going in to an investment that there will be major declines, you are much less likely to panic when the inevitable declines comes. And despite the big run-up in these assets this year, the declines have still come. For example, BitCoin has had three declines of over thirty percent in 2017 alone. That is like having three bear markets in stocks in one year. But despite that, investors have tended to stay the course and not panic. This has led to amazing returns.

Obviously, stocks are never going to produce these kind of returns. And stocks represent a greater portion of most investor’s portfolios, which can make things more difficult, but I think many investors would benefit from looking at their stock holdings in a similar way. If you believe in stocks as an investment for the long-term and if you understand going in that you are going to lose 50% of your money a few times along the way, you are much better equipped to avoid the emotional decisions that get the best of most investors.

3) Don’t Let the Naysayers Sway Your Convictions

No matter what you invest it, there will always be people giving you every reason why you will lose your money. The stock market is notorious for this. Permabears are always present and are constantly talking about how the next big decline is imminent. Their playbook is very simple. They just keep calling for a bear market, and issuing forecasts for doom and gloom, knowing that eventually they will be right. And when that happens, they forget the years that they were wrong and all the money they lost for anyone who listened to them along the way, and instead focus on their brilliant bearish call. Then they parlay that into media exposure to tell everyone how they were right. Over my career, I have seen many people use this formula to build a following and make themselves money. But there is a problem with their plan; it doesn’t make money for anyone but themselves.

The same has been true during this rise in cryptoassets. There have been plenty of skeptics calling this the biggest bubble in history all the way up this year. Just like permabears in the stock market, they haven’t done anyone any good. That isn’t to say some of what they say may not end up being right, but the gains have been so great, at least so far, that it doesn’t matter.

Value stocks, which I am a big believer in, are currently an opposite example of the same thing. They have underperformed the market for a very long time, and there have been no shortage of pundits who think they will never come back. But even though they are down and cryptoassets are up, the same principle applies. What matters is that you do your own research and develop your own convictions and that you don’t let people with one sided opinions sway you. That approach has worked very well for people who have held cryptoassets this year, and even though it hasn’t worked this year in value stocks, it eventually will (but unfortunately for me not with 2,000+% returns).

The Challenges of Investing

At the end of the day, investing is challenging. As investors we are influenced by emotions and biases that can stand in the way of our long-term goals. It may not seem that way to anyone holding cryptoassets right now, but the day will come where it will, just like it has for all other assets. When that day will come is something nobody knows, but now is probably as good a time as any to take a look at what you can learn from what has gone on here. That will be the key to making sure these gains aren’t temporary and that you don’t offset these once in a lifetime returns with future mistakes.

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Jack Forehand is Co-Founder and President at Validea Capital. He is also a partner at Validea.com and co-authored “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Jack holds the Chartered Financial Analyst designation from the CFA Institute. Follow him on Twitter at @practicalquant.