As with any currency market, fluctuations are extremely common yet people still make the fundamental mistake of selling their cryptocurrencies in a panic response to the changes in the market. Revix founder and CEO, Sean Sanders, explains how to mitigate the risk to your investment portfolio from massive market fluctuations for your consideration.
Hodl (you read that right, Hold On for Dear Life) your cryptocurrencies for the long haul, or at least buy low to sell high, advises Sean Sanders, cofounder of Revix, on the recent fluctuations in the cryptocurrency space.
In recent weeks, digital currencies have been victim of the fluctuating tides of market speculation and regulatory revisions in certain regions, with pandemic-fuelled inflation fears looming, the market has felt the pinch. But if history is anything to go by, an uptick in the market is on the cards.
May’s slump in the cryptocurrency market saw some cryptocurrencies halve in value over a period of 11 days, with losses in the crypto market in excess of $1.3 Trillion, merely a fortnight after the market reached its all-time high of $2.6 trillion. Why the sudden and drastic fluctuation, many everyday crypto investors are asking.
When Elon Musk tweeted in February that Tesla had invested $1.5 billion in Bitcoin, instead of holding US dollars in reserve, everyone sat back and listened. That sent Bitcoin up by about 15% in a single day. Tesla then sold off about 10% of its Bitcoin holdings (roughly $272 million at the time) to prove that it is a liquid asset.
Musk also announced that Tesla was going to allow payments in Bitcoin. When he tweeted again a few weeks later that Tesla would no longer accept payment in Bitcoin, due to the high environmental impact of its mining and transactional processes, this changed the market sentiment once again and saw cryptocurrencies fall by more than 10%. Tesla shares also took a dip. Bitcoin’s price increased to over $39 000 (up by 9%) once again, when in mid-June Musk said that Tesla might accept Bitcoin payments in future, if clean energy was used by cryptocurrency miners. Many have called his influence market manipulation.
This volatility was coupled with The People’s Bank of China issuing yet another statement in May reiterating that it would tighten crypto-regulation in China and clamp down on cryptocurrency mining, trading and Initial Coin Offerings to limit potential financial risks. It advised banks and payment platforms that doing business with cryptocurrencies was illegal and would result in various penalties. Numerous cryptocurrency exchanges have already discontinued their miner-hosting services in mainland China to protect their investors’ interests. This ongoing wave of regular Chinese regulatory crackdowns continue to shock investors’ moods.
On the back of these two events, hundreds of thousands of everyday investors were driven by their emotions and began to panic sell their cryptocurrencies. This resulted in erratic movements within the market. There wasn’t a single cryptocurrency among the top 100 (by market capitalisation) that wasn’t impacted, with the exception of a few stablecoins (namely those whose values are fixed to a fiat currency, such as USD Coin, Tether, and Dai) and offer more investment stability.
Since 2017-2018, the crypto space has generally seen bull cycles (an upward trend) which has pulled back by around 30%, up to five times. This isn’t out of the norm and has happened many times before. And it will not be the last.
Investing – no matter the asset class or investment portfolio – is as much an emotional game, as it is a thought-out rational game. Some people get a thrill out of those ups and downs. These people were ecstatic when they saw their investments in cryptocurrencies double, triple and, in some cases, increase 10-fold. Now that the market has pulled back they are very quick to divest. You have got to be in it for the long haul. Hold on, or Hodl – as the cryptocurrency lingo goes. As the market is certain to rebound, as it has many times in the past. This slump in market value is a great buying opportunity – buy low, so that if you don’t want to hodl, you can sell at a higher price.
At the same time, responsible investors should never over expose themselves to a single asset, whether it be a traditional or an alternative asset. A good gauge for this is the moment you begin to feel panic, you have most likely overexposed yourself to a particular investment or asset class.
A diversified investment portfolio across various traditional and alternative asset classes is always advisable. And wise investors will also diversify their investments within both of these classes in the form of a JSE Satrix Top 40 or a cryptocurrency bundle of the top-performing cryptocurrencies.
My advice is to divest from fiat currency, as over the long term, in the next 10-20 years, they will drastically decrease in value, if not become almost entirely worthless. I feel that the cryptocurrency market has matured sufficiently since 2017-2018 to eventually regain its losses. In fact, we’ve already seen a recovery and Bitcoin has jumped from $30 000 to more than $39 000, at the time of writing, since May’s slump. I see Bitcoin hitting $100 000 before the end of the year. Hodl, hodl for dear life.