Lessons from Bitcoin price fall and future of the cryptocurrency
The recent selloff in the most popular cryptocurrency -the Bitcoin, is a wake-up call for those investors smitten by astronomical returns provided by this unofficial unit.
The thrashing received so far highlights the importance of sovereign currencies and the need to understand the risk associated with cryptocurrency.
Although, it is desirable to expect volatility in a speculative risk asset, taking an informed decision based on the degree of uncertainty overrides the benefits on offer.
Uncertainty over its value shortly amid such high volatility limits the need for bitcoins and other cryptocurrencies as a medium of exchange.
Bitcoin, the largest cryptocurrency by market value, on Wednesday had plunged 30 percent to hit the $30,000 level, weighed down by China’s regulations on crypto trades and Tesla’s decision to suspend vehicle purchases using Bitcoins.
In the last 24 hours, Bitcoin touched an intraday high of nearly $40,000 and a low of $30,000. Bitcoin is still over 200 percent up from September 2020 and 27 percent so far this year.
This shows the huge amount of volatility that persists in the crypto market as against the traditional currency market.
“A nearly 40 percent dip in bitcoin price from its all-time high looks dramatic but is normal in many volatile markets, including crypto, especially after such a large rally,” said Avinash Shekhar, co-CEO of ZebPay.
Such corrections are mainly due to short-term traders taking profits, while long-term value investors might call these lower prices a buying opportunity.
“Technical analysts would call this a test of the support level around $40,000. Neither type of investor would say that tweets are the underlying cause. Investors should invest in education first.
Research the underlying value of Bitcoin, Ethereum, and other crypto-assets as you might look at a company’s information before buying stocks.
Use strategies like rupee cost averaging and SIPs to more confidently maneuver through volatility and take a long-term view,” Shekhar added.
Nithin Kamath, founder, and CEO at Zerodha said he has no exposure to cryptocurrencies, “But the rules for investing are the same: Reduce percentage exposure if the risk is high, and do not average down.”
According to Sumit Gupta, founder and CEO—CoinDCX, investments in cryptocurrencies too should be driven by financial situation and goals.
For those looking to diversify and grow their portfolio, Gupta believes that a long-term approach is warranted to benefit from the potential rewards of blockchain technology and its positive impact on cryptocurrency prices.
On the other hand, for immediate goals, he thinks that adopting a short-term approach with a clear risk-reward ratio is beneficial with quicker potential returns.
“Wisdom would point towards thorough research, entry near support levels for the said cryptocurrency and ensure to periodically review holdings while maintaining a strict stop loss based on risk appetite,” Gupta added.