Cryptocurrency crash: Risk appetite will take time to return once market bottoms out, says Margaret Paprosky, co-founder of InvestDEFY
Over the past few weeks, we have experienced some of the worst bear crypto markets in a while. The prices of Bitcoin (BTC), Ethereum (ETH) and altcoins have declined. Some of the big crypto names including Terra/Luna, Celsius and most recently, Three Arrows Capital have crashed or are facing liquidity crunch. With more casualties likely in the days, weeks and months to come, is there any way to navigate this crypto crash?
The Crypto Crash: Rules of Thumb
It is important to remember that investing in cryptocurrencies is a highly volatile and high-risk investment that is not suitable for many investors. For example, the one-month volatility for BTC is 141 and the one-month volatility for ETH is 186. This compares to the one-month volatility for the average G10 currencies, which is 9.5 (although the volatility of all three has increased of late).
Whenever you are investing in something where you are expecting 10x or 100x returns, which is by no means ideal, that investment will come with significant risk. Therefore, only deploy the risk capital that you can afford to lose. If you decide that you want to gain exposure to the crypto markets, here are five rules of thumb:
Understand what you are investing in
Are you buying BTC, ETH or Altcoins? Are you keeping those investments in your wallet or are they sitting with a given location or on an “exchange”? Have you staked, loaned or otherwise positioned your assets to earn a return beyond potential appreciation? If you are not keeping your investments in your wallet, have you considered counterparty risk? Do you understand how your capital is being used? Did you know that crypto venues and “exchanges” are generally not covered by any insurance or protection similar to SIPC protection?
All these questions are worth considering. Historically, it has been hard to get a real glimpse under the hood of how your capital is actually being deployed. Hopefully, one of the benefits of this recent crash is increased pressure on location and “exchanges” to provide account holders with greater visibility into how capital is being deployed. Do your homework and ask questions before deciding whether to deploy your capital in a given location.
Accept that unless you are lucky, you will not be able to time the markets properly.
We know prices are down at the moment, but have they completely bottomed out? Maybe not. Really no one knows. Do not enter these markets with the belief that you are a professional trader and can time the market either up or down. If you can capture 60% or more of the move then consider it a great success.
Unless you are an expert, do not attempt to actively trade in these markets.
These markets are highly volatile and operate 24/7/365. You may go to bed thinking that you have made a big trade only to wake up to a significant loss. The fact that these markets operate 24/7/365 is a very important difference from traditional finance markets.
Avoid Leverage Now – And Maybe Always,
These are highly volatile markets.
Be aware of the timing of your investment,
The closer you are to using up your investment dollars, the less risky and less volatile your investments should be.
Crypto Crash: navigating choppy waters
In trying to navigate the choppy waters, it is important to remember that crypto markets do not operate in a vacuum. There is a correlation between what is happening in the broader financial markets and what is happening in the crypto markets. Right now, the Fed is raising rates to historic levels. The Fed raised interest rates by 75 basis points, the biggest increase since 1994. With tight market support, markets across the board are going down.
As it pertains to crypto markets, BTC dominance is likely to continue whether cryptocurrency prices rise, fall or remain the same. The general expectation is that once the crypto market bottoms out, the price of BTC is likely to rise before the price of ETH and certainly before the price of altcoins. Due to the dominance of BTC, if you want to start getting some exposure to crypto, one strategy is to convert a portion of your crypto investment dollars into BTC and a portion of stablecoins (stablecoins with sufficient reserves as collateral). ) or alternatively deploy. Keep a portion in cash.
Another strategy is to buy a bit of risk on an ongoing basis rather than trying to time the market right. This gives you the advantage of dollar cost averaging to increase your stack. So, if the price is lower today but the price is even lower next week or next month, you haven’t put all your eggs in one basket. Similarly, if you are looking to adjust your position, try to do it in installments, not all at once. As the price of BTC rises, there may be an opportunity to transfer some of your crypto exposure to ETH and/or altcoins depending on your investment horizon.
Crypto Crash: Recovery Isn’t Linear
It is doubtful that we will see a V-shaped recovery. Once the market bottoms out, it will take time for the risk appetite to come back. So, don’t jump on the assumption that you will miss out on recovery because of FOMO (fear of missing out). The recovery and accumulation phase will take time. Bear markets often continue longer than initially expected. Sometimes the best thing to do is nothing. You are not required to hold any position.
Over the next few times it is expected that any increase in the price of crypto will be followed by a fall in value as those who want to reduce their risk or who want or need liquidation can take advantage of any price increase. Will try to pick it up.
About the Author
Margaret Paprosky is the Chief Operating Officer, General Counsel and Co-Founder of InvestDEFY, a sophisticated structured products company that drives the development of crypto investments. Margaret has a diverse tradefy skillset with over 20 years of experience as an attorney, CPA, CMA and financial professional. Prior to co-founding InvestDEFY, Margaret served as General Counsel for Midnight Sun Financial Group, where she oversaw the issuance of $3B in structured financial products over three years. Margaret previously practiced tax law with a focus on corporate restructuring, acquisitions and disinvestment, and she was an investment banker at Lehman Brothers in the US for five years. Margaret holds an MBA with distinction from the Kellogg School of Management.
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