Winter is coming… or has it been? Anyway, here’s how to survive a crypto decline
Link copied to
It hasn’t been the greatest start to a crypto year. We’ve seen more than a trillion dollars of wealth wiped out in a matter of months, ongoing economic uncertainty over the pandemic, and the looming threat of potential rate rises from the Federal Reserve.
There’s been a small relief rally or two since its announcement to postpone inflation-combatting decisions until March, but is there enough strength for a sustained recovery in Q1? Bitcoin, in particular, has been trading up and down (largely down) this year in tight correlation with trad stock markets, so crypto’s fate might feel in others’ hands at present.
But despite all the gloomy headlines, some analysts claim an impending “crypto winter” isn’t a foregone conclusion.
Now may not be the winter of our discontent
Dr Brent Coker, consumer psychologist and marketing academic at the University of Melbourne says the current crypto market activity doesn’t look that severe.
“I wouldn’t say it’s a crash,” he said. “But I’m speaking from the perspective of somebody who was trading in December 2017 when things went through the roof and just crashed in January 2018. That was a crash. That was a clear bubble that was going up, followed by a whole year of Bear market where Bitcoin dropped right to $3000. I wish I had bought then.”
Henrik Andersson, CIO at Apollo Capital says he wouldn’t call it a crypto winter – yet. But even if we are, it’s unlikely to last as long as previous cycles, due partly to the increased interest in crypto relative to previous years.
“There is a lot more money flowing into crypto,” says Andersson. “The feeling is that there is still a lot of money on the sidelines, and there are a lot of people looking to enter the market that might see this kind of volatility as a good time to get exposure to crypto assets if they are not already in the market.”
Adam Poulton, chair at Blockchain Australia and managing director of Get Paid in Bitcoin on the other hand, says that though he would describe the current movement as a crash, he is nonetheless unconcerned.
“The Bitcoin market moves in approximately four year cycles,” says Poulton. “People that have been involved in crypto markets for eight years or so now would have seen a couple of these price rises and then crashes, and it all seems quite scary when something drops in value by dozens of percent of or 50% in a short period of time. But I think it’s reasonably normal and expected. The Bitcoin price exchange rate wasn’t unexpected for me.”
Most of the analysts say that what crypto investors are witnessing isn’t a crash, but a correction.
Caroline Bowler, CEO of BTC Markets says that the price drop in Bitcoin, for example, has created a wall of buy orders on the exchange.
“Investors are on the sidelines, waiting to come in at lower price points. In a show of confidence, the sell orders have flattened. We’re seeing that play out in the price recovery underway at the moment.”
Dr Coker says what he’s really counting on is “for Bitcoin just to chill”.
“It’s halved in price since November, but it’s hitting a major support level at the moment, so it’s probably just going to relax for a bit. No altcoin trader likes it when Bitcoin is being volatile… but a lot of these altcoins have been going up and up for a while, and they can’t go up forever. They need to correct at some point.”
Investors are operating in a new macroeconomic environment; central banks are expected to hike interest rates, which is affecting not just cryptocurrencies but other global assets.
The stock market started off the year in the red, tech stocks in particular. The NASDAQ was down every day last week. Henrik Andersson says this is all part of a global macro trend.
“Markets are all about pricing things in, so in this new macro environment, what’s going on now is a kind of repricing on markets to set the expectations for interest rate hikes,” he says.
Adam Poulton says we’re seeing history repeat itself, and that current price movements in crypto are quite similar to what happened four years ago where the then largest exchange in the world, Mount Gox, shut down causing the crypto bubble to burst and prices to plummet by 70-80%.
“This time around, you could probably point to the stories that came out a few months ago about China banning Bitcoin mining as about the time that we started seeing the prick of the bubble, and the southward movement of prices. “
While crypto markets have endured several dramatic crashes and prolonged winters previously, past declines were not so closely correlated to equity markets.
Looking at the price movements in equity markets in Australia and the US, Adrian Przelozny, CEO of Independent Reserve says it appears that crypto may even be a leading indicator.
“Crypto crashes tend to occur a little bit before the equities markets have very large movements,” he says. “The ASX was down 6-7% on the 27th of January, and that happened after the crypto markets had a correction, so there definitely is a correlation. But which one is the leading indicator here is not quite obvious to me, whether crypto is moving after the equities markets or whether equities markets are actually moving after crypto.”
Dr Coker says that while Bitcoin is almost certainly tied to traditional stock market index shifts, it’s difficult to say whether it is reacting directly to economic decisions, or if it’s reacting to stock market behaviour.
“If that were the case, it would only be Bitcoin,” he says. “All the other coins follow what Bitcoin is doing.”
Coker says it appears that Bitcoin is starting to act as a digital stand-in for gold.
“Like when the market goes south, everyone sells and puts it all in gold because they think gold is stable,” he says.
Caroline Bowler says that it is important to delineate that only some cryptocurrencies position themselves as finance related, the best known currency being Bitcoin.
“However, as an example, the second largest crypto-asset, Ethereum, is a utility token,” she says. “Its value comes from its use within the businesses, services and functions built using the Ethereum blockchain.
“External factors have limited impact. That said, no asset class is an island and wider macro themes play a part, particularly regarding investor confidence and investible funds.”
By all accounts, even if this is a crash, and on the off-chance that winter is, indeed, coming, now is not the time to panic.
Most institutional investors take a longer term view on the market, and while they might see the current volatility as an opportunity for exposure, for the average retail investor, there are a few important points to make for surviving a crypto winter.
Lesson 1: Do your research
Whether you’re new to crypto or a seasoned pro, Caroline Bowler suggests investors review the historical data of previous market dips – both in crypto and traditional finance.
“New investors can learn from market cycles and react accordingly,” she says. “Keep in mind, crypto is known for its volatility. Review your portfolio allocation against your investment goals and timelines.”
Lesson 2: Don’t use leverage
The next lesson is: don’t use leverage.
“If you use leverage, I can trade a margin, then you’re likely to get wiped out from the volatility in crypto,” says Henrik Andersson.
Lesson 3: Don’t be overexposed
And while this might seem like an obvious point to make: don’t be overexposed to crypto.
“If you can’t stomach it to ride the volatility over the next few years, you probably are overexposed to crypto, so don’t put more money into crypto than you’re prepared to to lose.”
Equally important is educating yourself about what you’re investing in, and once you’ve done that, hold strong.
“Over time, the price trends of these assets tend to point upwards,” says Adrian Przelozny. “Personally, I’ve always been a holder, so I don’t really concern myself with the up and down movements. I’d advise people just to hold on.”
Eunice Wong, director at Unicorn Venture Capital and a crypto trader said this is her first experience with a bear market, and that while she doesn’t regret selling low, the experience provided her a valuable perspective on her trading strategy.
“Due to my lack of experience I was extremely bullish crypto so when the sell signals presented I chose to go to cash and observe,” says Wong.” “The lesson here is in future I’ll keep my bias at neutral instead of bullish and then I’d be more willing to take the short signals which are the same patterns I trade on the upside but in reverse.”
Lesson 4: Don’t buy the hype
The final lesson for surviving a hypothetical crypto winter is: buy on the dip, and don’t let the headlines scare you.
“I think that’s another mistake people make,” says Henrik Andersson. “You see all these scary headlines – ‘the market is crashing,’ ‘a trillion dollars wiped out’ – and that might cause some investors to lose interest or lose hope in crypto and they end up selling at the bottom.
“If you believe in crypto and web3 and the decentralisation of finance and what’s happening in the NFT markets, if you believe that has long-term value like we do, then don’t be scared of the headlines and don’t sell at a low. The movements that have occurred over the last few months is really nothing new.”