The year 2022 has not been a good one for crypto assets, as investors have seen sharp profit booking after a solid rise in 2021. Bitcoin, the cryptocurrency with the largest market capitalisation, closed at around Rs 17.55 lakh on 13 June, 2022 — its lowest level since December 2020 — on growing fears of the US slipping into a recession and in anticipation of rising interest rates.
“There is carnage in the crypto markets and the community is under severe distress. It’s havoc to be exact,” says Kunal Jagdale, founder & CEO, BitsAir Exchange. Bears are in a ruckus and crypto investors have no refuge now as Bitcoin has taken a bit hit, he adds.
“The entire market has fallen. One can just hold and sit tight,” says Rishi Anand, Partner, DSK Legal.
Let’s look at reasons for the price crash and investment strategies for existing and new crypto investors in the current market conditions.
Factors leading to price crash
Bitcoin, Ethereum and other cryptocurrencies declined on 13 June (see graphic) because data released on Friday showed US retail inflation unexpectedly climbing to a fresh four-decade high, reviving fears of prolonged Federal Reserve rate hikes that could stall economic growth.
Global policymakers are making efforts to combat rising inflation. Rising interest rates and a correction in the S&P, Dow and NASDAQ, tech stocks in the US and commodities (gold and silver) have nudged crypto investors to shift. “Adding to investors’ pain, Terra’s LUNA debacle and heavy institutional selling were the other key reasons for the crypto selloff,” says Jagdale.
“Cryptocurrencies, because of their higher volatility and smaller market size, fall steeply. But there is likely to be firm support at around $18,000 for bitcoin,” says Sidharth Sogani, CEO of CREBACO Global. Jagdale warns that if the bitcoin price falls below the $20,000 mark, things might get uglier and investors should brace themselves for worse price action.
I have invested in Bitcoin, Ethereum and other cryptocurrencies. What should I do in the current situation?
Crypto enthusiasts suggest that if your crypto portfolio is down significantly but you don’t need the money, then hold. Don’t panic with the current price crash.
“If you need the money or are uncomfortable, perhaps sell half the portfolio so you have cash in hand. And are also partly invested in the current market,” says Naimish Sanghvi, founder of Coin Crunch India.
I am planning to invest now for the long term as cryptocurrency prices have corrected. What should be the strategy to invest?
New investors should only stick to the Bitcoin and Ethereum cryptocurrencies for the time being. “They are like blue chips in the crypto market. I would advise investors to invest 70% in Bitcoin and 30% in Ethereum,” says Sogani.
Do not invest a lumpsum amount in this price crash of cryptocurrencies. “Instead, adopt a systematic investment plan (SIP)-like structure to invest small amounts every week,” Sanghvi suggests. Some exchanges, such as Bitbns, Unocoin, Vauld and Zebpay, allow you to start an SIP in Bitcoin, Ethereum and other cryptocurrencies. With SIPs, you can average out your buying price and it saves you from severe losses.
Sogani warns that there will be a lot of scams and promising projects in the current market — stay away from them. It’s not a good time to invest in new crypto coins.
“Crypto investments are highly risky, so you should not invest money that can make you uncomfortable with a price crash. Invest as much as you can afford to lose,” says Sanghvi.
Be cautious
Although advertising watchdog ASCI has come down hard on celebrities advertising cryptocurrencies and you’re less likely to see such ads henceforth, there could be an occasional commercial or two nudging you towards cryptocurrencies.
Do not fall for such messages. Do your own research first. More importantly, ask yourself: Are cryptocurrencies really suitable for me? In other words, check your risk profile. You should understand cryptocurrencies before investing. Don’t just follow the herd. “Avoid the fear of missing out (FOMO) syndrome,” says Jagdale.
Avoid gambling while investing in cryptos. Don’t forget to book profits regularly. And limit your overall exposure in cryptocurrencies to 2 percent of your total investment portfolio, especially if you aren’t used to the hyper-volatility of cryptos.
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