By RICARDO EVANGELISTA
As the era of cheap money comes to an end, so do the conditions that propelled the price of Bitcoin and other crypto assets to the dizzying highs reached at the end of last year. At the time of writing, Bitcoin was trading just above $27,000, a drop of more than 60 percent from all-time maximum of almost $69,000 touched last November.
The last time Bitcoin faced a similar crash was in 2018, when investors assumed that gains recorded during the previous 12 months, rising from around $1,000 in January to almost $20,000 by year-end, were the result of a bubble and decided to cash in. This triggered an avalanche of sell orders that eventually, 12 months later, drove the price down to below $4,000 - a drop of 80 percent.
This time around the reasons for the crypto devaluation are more complex. There is still an important speculative element behind the current market dynamic, but the main driver for the selling pressure is the ongoing tightening of monetary policy by the world’s central banks. This change of stance, triggered by rising inflation, is driving a hawkish tilt towards steeper interest rates and reduced asset purchases, shifting the mood in the financial markets.
A perfect storm of inflation, energy crisis, draconian COVID containment measures in China, and the war in Ukraine, forced central banks to withdraw stimulus monetary policies, which in turn reduced risk appetite and liquidity in the markets, as the outlook for global economic growth deteriorated. Amid such a scenario, investors are reconsidering their strategies, ditching risk-related assets and converting large portions of their portfolios into cash.
After the bonanza of the COVID-era stimulus, which generated uniquely supportive conditions for risk-related assets such as growth stocks and cryptos, the tide is turning and the tech-heavy Nasdaq index is already in a bear market, having lost almost 30 percent relative to the high watermark touched in November 2021. However, in the case of Bitcoin, the scenario could be even bleaker as, unlike stocks of companies, which are supported by the fundamentals and intrinsic value of the underlying business, there is little more than the belief of investors in higher future prices to support its value. As the markets’ risk appetite evaporates, one wonders where the bottom may be for cryptos.
Nevertheless, some see the current conditions as an opportunity. Buying the dip is an old investment strategy, where investors with a long-term plan take advantage of bearish market conditions to buy at a discount, aiming to cash in as prices eventually recover. The crash of 2018 was a good time to apply such a strategy. Those who bought Bitcoin at $3,000 in 2018, and selling less than then years later, when it was close to reaching $70,000, realised a return on investment close to 2000 percent.
However, we must not forget that past performance is not a guarantee of future results. Still, for those who are willing to continue to bet on future crypto gains, a balanced strategy will require portfolio diversification and careful money management. Only investing money that is not required elsewhere, in a range of coins, that offer hedging against each other, and not worrying too much about the short to medium-term performance. This is because conditions may yet deteriorate before they get better.
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