The problem with the cryptocurrency market is that it is inherently volatile (as well as being deregulated)
The analysis by Michele Morra, Moneyfarm portfolio manager
The last month was characterized by the sharp collapse of Bitcoin which, going from 63 thousand dollars to 35 thousand in a few weeks, brought the whole world of cryptocurrencies with it (the Bloomberg Galaxy Crypto index lost 40%), causing a large sell-off. , with Bitcoin, Ethereum, Dogecoin all showing impressive declines and panic-driven sales. These jolts aren’t uncommon, but the May fixes were the most serious in the history of major cryptocurrencies. This large collapse wiped out about $ 1 trillion in market value, a good chunk of the $ 2.5 trillion cryptocurrencies had come to capitalize at their peak (less than the value of the two largest S&P 500 companies combined). The explanation for what happened is quite simple: a series of news has reversed the sentiment on the cryptocurrency and many traders have decided to monetize their position. The drop in price triggered a panic-driven sale that also sent some of the major trading platforms into a tailspin. On the losing side of the deal there were many investors who had bet on cryptocurrencies in recent months, on the wave of positive results.
VOLATILITY IS INEVITABLE
The change of mood was fueled, we said, by some news, such as China’s announcement of its intention to regulate cryptocurrencies. Meanwhile, environmental concerns led Elon Musk to give up his (and Tesla’s) support for cryptocurrencies, causing further market drops. However, the large-scale sell-off doesn’t fundamentally tell us much about Bitcoin’s future performance. Given their (short) history, it is not impossible to imagine that the price of Bitcoin or Dogecoin could go up again, as has happened in the past. The problem for those speculating on when the next peak might be is that pinpointing the right time is by no means easy. This applies to any risky asset, including cryptocurrencies, but few compare to Bitcoin in terms of unpredictability. Volatility is part of investing, be it cryptocurrencies or government bonds. Without it, investors wouldn’t make any money. The problem with the cryptocurrency market is that it is inherently volatile (as well as being deregulated): Ethereum creator Vitalik Buterin himself acknowledged that the current market situation is a bubble, before noting that it can be “hard to predict” when the bubble bursts.
NOT ALL CRYPTOCURRENCIES ARE THE EQUAL
There is more risk inherent in some projects than in others. Bitcoin’s high valuations and track record, for example, advise against a heavy investment in this currency. Not to mention alternative currencies (the so-called alternative coins) whose price is driven only by speculation: an investment in these projects is equivalent to playing roulette, where you have the same chance of doubling your capital or losing everything. There are also some blockchain technologies, such as Ethereum, which are already used in real-world applications such as NFTs. The sophistication of Ethereum’s smart contracts means that developers can easily build decentralized applications powered by blockchain technology – Ethereum, as a result, has a loyal group of followers who see it as the future of the industry. All this to say that, ultimately, it is too early to understand what the future of blockchain technology will be. This technology is developing at a rapid pace and we will continue to see applications developed in the real world. This does not necessarily mean that there will be a positive reflection on the value of Bitcoins, and it is even more difficult to predict exactly which cryptocurrencies will dominate or last in the long term.
BET ON CRYPTO? DIVERSIFYING IS THE ANSWER
Contrary to what many are led to believe, this is a complex environment to trade in that does not necessarily offer a better risk / opportunity ratio than other asset classes. Those who adopt a medium-long term approach know that there is a risk associated with the sustainability of individual projects. There is little doubt about the fact that blockchain is a useful technology, but we cannot predict which currencies will dominate over the next few years. For those interested in investing in cryptocurrencies with a speculative intent, remember that trading cryptocurrencies in the short term is very risky, but could be considered a potentially profitable component of a larger investment portfolio. During times of high market volatility, fortunes can be made (but also lost). There is nothing new in this: market bubbles have always been a potentially profitable opportunity for some and a bane for many. The same logic applies to cryptocurrencies: many people feel more comfortable engaging in speculative trading with cryptocurrencies because they feel that somehow it is easier to profit from it. On the contrary, cryptocurrencies are an unregulated market, very exposed to actions and speculative manipulations of the stock markets, at the mercy of volatile communication sentiments. Consequently, successfully trading cryptocurrencies is complex and requires nerves of steel, especially in bad times. As with any trading activity, cryptocurrencies require perseverance, skill and luck: it is an activity not to be recommended to most people, even with a marginal share of their savings. For those interested in investing in the blockchain with a long-term logic, the advice is to keep a diversified portfolio to compensate for any losses deriving from cryptocurrencies.
The blockchain is probably here to stay, but we cannot predict whether Bitcoin, Ethereum or other coins will be too and we are not at all sure that their price will continue to grow more than that of other asset classes (such as equities). Of course, we don’t rule out investing in cryptocurrencies in the future. The current level of volatility will likely subside as blockchain technology integrates into society as many expect. For now, however, the volatility associated with cryptocurrencies places these assets outside our acceptable range.