Bitcoin and other cryptocurrencies fell sharply as investors dump risk assets. A crypto lending company called Celsius is pausing withdrawals for its customers, sparking fears of contagion into the broader market.
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Cryptocurrencies have had a rough year.
Bitcoin has plunged more than 52% year to date and is now hovering around $21,000 per coin, according to data from Coindesk. The most popular cryptocurrency has shed about 70% of its value since hitting an all-time high of roughly $69,000 in November.
The entire crypto market is feeling similar pain. The overall market capitalization of crypto assets has dropped to less than $1 trillion from its November 2021 peak of $3 trillion. It’s the first time since 2021 that the asset class has been worth less than $1 trillion.
Many other assets are also experiencing volatility that’s shaking investors. The S&P 500 Index this week fell in bear market territory, defined as a drop of at least 20% from the most recent high. Bonds are also sliding, leaving investors few places to hide in markets.
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This turmoil is nothing new, however.
“The first thing I tell people is that crypto is probably eight times as volatile as the market,” said certified financial planner Ivory Johnson, founder of Delancey Wealth Management in Washington, D.C.
Crypto prices may have further to fall
Given today’s macroeconomic environment, with the Federal Reserve tightening interest rates to stave off high inflation, some crypto investors think prices may fall further. Companies are also preparing for a recession and possible “crypto winter,” or when prices fall and stay low for an extended period.
“This wouldn’t be a good entry point now,” said Johnson, adding that the one exception would be investors with very long time horizons and who are dollar-cost averaging into the asset, similar to how people invest with a 401(k) plan.
Now is a good time to check your asset allocation, he said. Generally, advisors recommend that bitcoin be just a small part — between 1% and 5% — of your total portfolio.
Investors who have been holding cryptocurrencies and saw a big runup in price should have trimmed their stakes to make sure that the asset wasn’t too large a portion of their portfolio, Johnson added.
“You have to be more vigilant because it’s more volatile,” he said.
What’s behind the crypto shakeout
Some of the price action in cryptocurrencies is due to recent failings of companies such as Terra and Celsius.
In May, Terra’s stablecoin, UST, plunged below $1 in value and prompted investors to flee the asset. Its sister coin, luna, also dipped.
On Monday, cryptocurrency lending firm Celsius paused all account withdrawals, stoking fears it will soon close.
“What you see now with this selloff, this drawdown, is just a lot of excess in the space that needed to be cut,” said Tyrone Ross, CEO and co-founder of Turnqey Labs, Inc.
The shakeout is also showing what’s “complete nonsense versus what actually has the potential to continue to either be a store of value or an asset that’s worth something,” said Douglas Boneparth, CFP and president of Bone Fide Wealth in New York.
He added that while the drawdown has been brutal, it’s not the first time bitcoin investors have weathered such a storm.
‘You might see this as a great opportunity’
To be sure, the dip in price doesn’t mean than long-term investors should hold off on buying bitcoin, especially if they see a deal in the asset.
“I don’t think the rules really change here; if you’re a believer in bitcoin, then you might see this as a great opportunity,” Boneparth, adding that’s the same as investing in other assets.
Young venture investments have wonderful upside, but they come with a lot a volatility.
Tyrone Ross
CEO of Onramp Invest
If you are still buying now, “it’d better be paired with long-term conviction,” Ross said. He also noted that investors buying into crypto now should think of it similarly to venture-backed investing in terms of risk and potential reward.
“Young venture investments have wonderful upside, but they come with a lot a volatility,” Ross said. “They can die off of environmental changes.”
In addition, some investors may be able to do tax-loss harvesting with bitcoin, to offset profits with losses, as there is no wash rule. Basically, this means you could sell your bitcoin and immediately buy it back at a lower price, which could set you up for larger future gains.
“Those are prudent things that advisors should be doing with their clients, and we should be expressing to the average investor to take advantage of some of this ridiculous volatility,” said Ross.
Now’s the time to educate yourself on cryptocurrency
sorn340 | iStock | Getty Images
Ross also said now is a good time to educate yourself on cryptocurrency if you’re interested in investing in it someday.
He recommends that people look for books, videos and articles to go back to investing basics. Understand your risk versus reward, only put in what you can afford to lose and use strategies such as dollar-cost averaging to combat choppy price action, he said.
It’s also a great time to make sure you have a plan and stick to it, added Boneparth. “Do as best of a job as possible to tune out noise,” he added.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
Source : CNBC
