Crypto prices are telling us that there’s a storm brewing if it’s not already here, so the sensible thing to do is to batten down the hatches.
But what exactly does that mean for market participants in the cryptocurrency space? What action can and should you take to preserve your wealth?
Increasingly it looks likely that the U.S. Federal Reserve FOMC will be increasing rates by a minimum of 0.75%, with 1% being a distinct possibility.
Crypto investors have never before been so fixated on the price of borrowing money, or at least not when it comes to the old type of money we know as fiat.
The circulation of goods and services of course depends on wheels of commerce being oiled by a plentiful supply of liquidity. But too much of that liquidity in the wrong places can cause problems, and one of them is inflation.
Inflation is the most obvious sign of a malaise that crypto adherents will be quick to shout we told you so – all that QE funny money just put off the crisis.
But the storm is such that it is and will envelope all before it, including cryptos, so how to prepare to weather it?
1. Don’t realize your losses
The first rule of investing applies to crypto too – don’t realize your losses by selling. We will moderate this later, but as a general rule don’t sell unless you have to.
For sure your favourite portfolio management tool will be flashing red. But if you are happy with the case for investing in all of those coins you hold, then stop firing up the app on the hour every hour and give it a rest. Maybe turn off some of those watchlist notifications too.
As he often does, legendary investor Warren Buffett sums it up nicely:
“The first rule of an investment is don’t lose [money]. And the second rule of an investment is don’t forget the first rule.”
2. Time in the market no timing the market
Another useful adage to be cognizant of at this juncture is the ultimate folly of trying to time when to enter and exit the market. The normal practice of the herd is to buy at the top and sell at the bottom.
The smart investors do the opposite, they try to buy at the bottom – or at least when others are fleeing the market and decimating prices – and selling at the top.
That is not to say that you should sell everything, go into cash and then wait for when you think the bottom is in.
Even Wall Street’s finest can’t get those calls right, and they charge you top dollar for their active mutual funds that claim they can.
The best strategy is to stay in the market but to adjust and rebalance, which we talk about further below.
3. Become a crypto value investor
Warren Buffett is the classic value investor and that is one of the reasons why he hates crypto with a vengeance.
He doesn’t know how to measure value in crypto as there are no earnings and, supposedly, therefore no net income and dividends to be paid to shareholders.
Maybe it is a generational prejudice things, but there are plenty of crypto companies and assets that are producing earnings and paying dividends, so much so that the SEC has been knocking at the door of some of those entities, or will be – here’s looking at your Ethereum Foundation!
So there are fundamentals that can be valued, which ultimately reside in the value a network represents in, be that in data storage, gaming, value transfer etc.
So the value investor looks for companies, or in our case coins, that are under valued by the market. You might say that’s a tough call because everything is under valued right now. True to some extent, but some more so than others.
Is BNB coin undervalued?
Exchange coins such as Binance Coin (BNB) are hugely undervalued, for example, it could be argued, given that Binance is likely to emerge from this crypto winter as an even bigger and more dominant exchange than it already is.
Is Ethereum undervalued?
Ethereum, it could be argued, is also a contender as a uniquely undervalued network, given the success of its Merge upgrade.
Admittedly much more needs to be done before Proof of Stake is a meaningful reality for end users, but in the eyes of a value investor, Ethereum has just become a cash cow for the network’s validators.
Gaming is a sector where revenue is being generated by a host of networks and the games that run on them. There are no indications that this trend is slowing – on the contrary it is likely to pick up speed.
4. Be a bottom-up investor
Don’t be too dogmatic in your approach. Even if you are taking the value approach and you have a bias to certain sectors and sub sectors, don’t let that blind you to a really good prospect.
Bottom-up investors take each case as it comes, analysing companies on an individual basis, even if they are operating in a sector deemed to be unfavorable. We can apply the same approach when it comes to crypto.
You may have determined that crypto cross-border payments at a commercial level are going to be squeezed by the advent of central bank digital currencies, but does that mean you should reject out of hand every opportunity in that area.
What if Ripple wins its court case? There could be a huge run up in the price of its XRP token and it could see adoption rocket as one of the leaders in the space.
5. Banish short-termism
The difference – or at least one of them – between a speculator and an investor is time.
The speculator is out to make a quick buck while the investor takes a longer term view the will typically be measured in months and years rather hours and days when it come to the speculator.
Warren Buffet once famously said:
“The stock market is a device for transferring money from the impatient to the patient.” Remember that’s true in crypto too.
6. Run your winners
Unfortunately many investors do not do the rational thing. As soon as a position goes into profit, the temptation to bank it is strong.
On the face of it that can seem a sensible approach, but more often than not investors will close winning positions too early, only to miss out on big future profits.
Certainly at times like this, when the market is moving as one on a downward trajectory, there doesn’t seem like much to choose from between the winners and losers.
However, in your total portfolio allocations, there will be better performers than others – they could still be the ones that are going to contribute most towards future returns.
7…cut your losses
Another way that human psychology acts against the best interests of the smart crypto investor is when our heart makes us attached to a losing position.
We said earlier don’t realize losses by selling, but sometimes that makes sense if the situation is not recoverable.
There are some coins that are cheap for a reason – actually there are thousands of them among the 20,000 or so listed by coinmarketcap.
Maybe the technology is beyond redemption, the path to user growth is irredeemably blocked and the business model shot to pieces. If so, get out.
8. Capital preservation with passive income
When billions are evaporating from the markets daily and inflation is running rampant, it start to feel scary. Where can you park your cash and stopping it from devaluing?
The answer used to be government debt (Treasury Bills) and savings accounts. But savings accounts still pay a pittance and the only bonds worth buying are Treasury Inflation-Protected Securities, or Tips as they are known.
Luckily, there is a safe port for your wealth to be found in crypto – staking.
Staking may have got a bad name after a bunch of crypto lenders imploded triggered by the TerraUSD debacle. However, not all staking is the same.
Staking your coins to secure a valuable network is different to throwing it in to the black box of tricks that underpinned the algorithmic financial engineering of TerraUSD non-stable stablecoin.
Stake with a network that has demonstrable traction such as Ethereum
Admittedly staking on Ethereum requires that you have a minimum holding of 32 ETH, which is the threshold to become a validator and may be beyond the means of many.
That will earn you enough – around 12% by some estimates if you include the burn effect which all ETH holders benefit from – to beat inflation at its current rate.
However, you can entrust your ETH to intermediaries of one sort or another who will stake on your behalf, so you will receive less return, but it will still far better than a savings account.
And there are alternatives to Ethereum – but go for the protocols and service providers with the deepest pockets.
These entities may not have the best yields, but they are much less likely to fail. Many of these intermediaries will be found among the larger longer-established crypto exchanges, such as Kraken, Coinbase and Binance
9. Look at the whole picture (other asset classes)
Professional investors say that, along with compound interest, asset allocation is the key to investment success.
To this way of thinking it isn’t so much what stocks or coins you invest in, so much as which asset class weights (percentage of holdings) you choose for your portfolio.
From a crypto investor’s perspective that means asking some hard questions about what percentage of your wealth you have in crypto, and is it an amount your feel comfortable with in terms of your own risk profile.
To state the obvious, if crypto accounts for 5% of your net worth, you are going to take a different attitude to a 20% falls in the total market cap of the asset class than you are if you have 50% of your wealth tied up in crypto.
If you have cash on sidelines, crashes are a huge opportunity
If you have cash on the sidelines and relatively small amounts tied up in crypto, then market crashes are huge opportunities.
Equally though, if you are at the other end of the spectrum and are all in when it comes to your net worth, then although your best bet is to hold tight, after the winter is over, look back and remember how you felt then, and add some diversification to your portfolio by investing in other asset classes.
A crypto core with some larger satellite holdings might be preferable – and keep your blood pressure under control come the next seasonal blast.
10. Don’t panic
Easier said than done. The best way to avoid panicked decision-making you later come to regret is to have a plan. Hopefully we have provided some pointers in that regard.