By David Goodboy
Even long-term crypto bulls have been shaken to the core with the recent selloff. I can relate.
I feel the pain of holding a portfolio of cryptocurrency assets while fighting a strong emotional urge to dump everything.
I know this pain well after being involved in the financial markets for nearly three decades. Having experienced the internet bubble, the market chaos of 9-11, and the mortgage meltdown triggered financial crisis of 2008, I have learned a few things about how to deal with this painful feeling.
First, don’t let emotions rule your decision making. Second, stay objective — even if it’s your money on the line — and, lastly, look for reasons behind the market turmoil. Ask yourself the following questions: Why is the sell off happening? Does it makes sense? Is the selling due to systemic, long-term problems, or is it merely part of the natural market?
Before we start answering these questions, it is critical to note that cryptocurrency is a different beast than the traditional financial markets for multiple reasons.
The crypto market is very young and untested. There is so much hype and vaporware in the crypto business. It is extraordinarily difficult to determine what is real and what is promotion when clarifying why something is happening in any specific cryptocurrency.
Due to these facts, the sell-off reasons provided in the article will be on the on the three principal digital assets, bitcoin, ethereum, and ripple, as well as the crypto market as a whole. The reasons may not apply to the lesser currencies so proceed with this knowledge. Here are three reasons for the crypto sell-off.
1. Bitcoin Futures
Like it or not, bitcoin leads the cryptocurrency market.
It is the granddaddy of the crypto business, and most others follow its price lead. Having soared from a few cents in 2009 to nearly $20,000 per coin in 2017, investors got use to off the charts crazy returns.
Today, things have changed, bitcoin has tumbled over 70% to less than $6500 from the all-time highs. Still a massive increase, but that does not help those who bought it higher than the current price!
So, what happened? Why the aggressive selling in the bitcoin market? Well, one significant change that triggered the selling was the advent of the futures market. Turning the bitcoins into legitimate, organized trading instruments via futures allow traders to short the coins. This ability has resulted in the underlying device (bitcoins) to sell-off.
The same thing occurred in the housing market when derivatives where launched allowing betting on real estate’s downside.
Here’s a tidbit that active crypto investors can use to create trading profits based on the futures. Bitcoin prices have dropped an average of 18% in the 10 days leading up to futures expiration date since their launch. At the same time, bitcoin usually moves higher six days after expiration per Tom Lee of Fundstrat.
2. Fraud & Fear
Ever since the Mt. Gox exchange disaster, crypto investors have been exposed to exchange risk via fraud and hacking. Nearly every month we hear about another cryptocurrency or exchange that has been hacked, is fraudulent, or just inept. These facts create tremendous fear in the market.
Fear is the reason people sell assets. Fear of loss is way more powerful than greed for profits in most investors. As for actual fraud and just the fear of fraud grips investors, cryptocurrencies are sold off resulting in price declines.
There is no question that fraud and hacking are genuine concerns in the crypto markets.
Unfortunately, these negative items remain part and parcel of the market as it matures. The good news is that fear inspired sell-offs provide opportunities for savvy investors to get long cryptocurrency at reduced prices.
The best way to avoid fraud is to stick to the significant cryptocurrencies and only trade in the world’s most secure exchanges. Gemini, Coinbase, and Robinhood come to mind as exchanges that have done the most to fight hacking and fraud issues.
While it is a positive thing for the long-term viability of the market, government attempting to regulate cryptocurrency is bearish.
Long the bastion of libertarians and other anti-government types, the fact that governments are stepping into the picture has resulted in many early adopters to dump their holdings. In other words, the core crypto base holders are selling their significant holdings. While some are reinvesting into lesser and riskier crypto assets promising privacy and immunity to regulations, others are avoiding the open market altogether.
Risks To Consider: The above reasons for the sell-off are only my opinion of what is happening currently. There are likely many other reasons that will emerge as time passes. Always exercise caution when investing and just use the money you can afford to lose!
Action To Take: The current sell-off creates an excellent opportunity for crypto bulls to purchase at discounted prices. Be prepared for volatility, average into positions wisely, and opportunity abounds!
David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
Investment Idea: The Daily Insider
We discovered a huge alpha between an insider transaction and the market’s reaction to it. After back testing millions of insider transactions, we were sure of this model’s performance. Interestingly, our daily long picks managed to return profits even in bear markets. To learn more about some of our best trading tips in Smarter Analyst’s Daily Insider newsletter click here.