How should investors weather this 'crypto winter'

The significant fall in prices of most cryptocurrencies from their November highs have left investors anxious

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After rising phenomenally in 2021, Bitcoin and other cryptocurrencies continue to plummet. Since November 2021, when Bitcoin reached its all-time high, it has lost more than one-third of its value to reach the current price of $19,151 (as of writing at 2.50 pm on July 4, 2022). Ethereum, another popular crypto currency, has seen a fall of more than 70% since November to reach a low of $1051.69 (as of writing at 02.50 pm on July 4, 2022).

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What is driving this crypto crash?

Industry insiders blame the recent crypto crash on major sell-off by investors, owing to rising interest rates. High inflation and economic uncertainty caused by Russia's invasion of Ukraine are also responsible for the current crash in the crypto market. Other factors include the fall of well-known crypto projects including Terra LUNA and Celsius.

However, it's believed to be different this time because the traditional Web 2 institutions had a first-time experience of crypto market volatility and the crypto traders had acknowledged how traditional institutional players react to it, says Khallelulla Baig, Co-founder and CEO, Koinbasket.

Says Rajagopal Menon, Vice-President, Wazir X, "All asset classes have done terribly since the start of the new year. Governments across the world have been pumping money due to Covid. It hoped that inflation could be controlled for sometime but it realised it's not easy. Controlling inflation requires an increase in interest rates. And when you do that, all the free money gets sucked out of the system. People transfer to safe harbours like gold and other commodities, and this affects the riskiest commodities like crypto the most."

Not crashing for first time

Cryptocurrencies are volatile and have witnessed various 'bear and bull' runs before. In 2018, Bitcoin plummeted as much as 80 per cent, and has lost more than 50 per cent as many as seven times in the past. But unlike earlier, the falling prices this time seem to have a larger impact as more people and institutions hold these currencies.

"People are worried because they have not seen anything like that but it has happened many times in the past. Volatility is the feature of this asset class because most markets shut down over the night, over the weekend, but crypto markets remain open for 365 days a year and 24/7," says Menon.

Says Vineet Budki, Managing Partner, Cypher Capital, a Dubai-based VC firm, "Crypto investment runs in 4-year cycles and the current drop is nothing new. It is similar to stock markets, which are also in bear territory.

Investors jittery

The recent crypto crash is proving to be a test even for long-term investors, who are losing their sleep seeing their gains being wiped out overnight. The big question on their minds is: is it safe to invest in the crypto market?

Explains Budki, "A person has to understand if he is a speculator or an investor which means the view on time on investment. If one is looking for a 10x return tomorrow, it is not going to happen but over the next 4 to 10 years, crypto will give massive returns compared to stocks, real estate, gold or any other asset class."

Agrees Menon,"When Bitcoin was at $67000, people were lining up to buy it and now it is trading below $20,000, they are saying it will go down to zero. It's the irrationality of the herd. Price is a sentiment. When there is blood in the water, all sharks come in."

However, they recommend investing in smaller lots. "If one wants to diversify the portfolio and stay committed for 5-10 years, investing in mutual funds will likely give 12-15% returns, but if one wants a kicker then one can put in at least 5% money in Bitcoin. But one should buy consistently over a period of time as you cannot time the market," adds Menon.

"It's a once in a 5 years opportunity where investors can find seasoned crypto projects at two-third discount. The best way to optimise one's portfolio is to allocate more funds to blue-chips such as Bitcoin, Etherium, Polkadot, Polygo and Chainlink. Beginners should not allocate more than 10% of their savings towards cryptocurrencies as they are highly volatile and risky asset classes," adds Baig.

While it remains unclear how long crypto carnage will last, one must consider the fact that Bitcoin along with other crypto currencies have always rebounded.

During the 2017-2018 crypto bear market, Bitcoin plunged 83%, from $19,423 to $3,217. But by November, 2021, it hit a high of $68,789. During the same period, Etherium fell from $1,448 to $85. But it jumped to a whopping $4,850 in November.

Crypto regulations around the world

Crypto regulations vary across the world. Some nations have recognized the decentralisation power of cryptos. They have made Bitcoin a legal tender. These include nations like El Salvador and Central African Republic.

In the European Union, each country has its own regulation for cryptocurrencies. Also, different states in the US have different regulations regarding it. China banned the currency in 2019. However, it continued online through foreign exchanges. In the UK, the trading of cryptocurrencies is not directly regulated. Canada, too, doesn't recognise cryptocurrencies as legal tender.

Back home, India has neither regulated nor banned Cryptos. However, the government is yet to table the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which seeks to prohibit all private cryptocurrencies in India. From April 1, 2022, the cryptocurrency investors are required to pay 30 per cent tax on their income. The government has further made it hard for investors by introduction of 1% tax deducted at source (TDS) on their assets, starting July 1, 2022.

The central bank of India has been against these virtual currencies for long. It has, in fact, many times in the past warned users, holders, and traders of the potential risks these currencies carry. Lately RBI governor Shaktikanta Das described cryptocurrencies as a "clear danger" and said that anything that derives value based on make-believe, without any underlying, is just speculation under a sophisticated name.

Source: News reports

Note: Investment in cryptocurrency and crypto assets is subject to financial risk and readers should do their own due diligence. Entrepreneur Media does not endorse any such investment.