By Shane Cummings, CFP®, AIF®, Wealth Advisor & Director of Technology/Cybersecurity
The crypto market has been in retreat since hitting all-time highs last November. With this major retreat in crypto prices, now is an ideal time to reassess several factors if you plan to remain invested in digital assets.
Bitcoin hit an all-time high of $68,990.90 last November 10th, but has since lost a significant amount of value. It’s trading around $36,965 as I write this – a loss of close to half its value. Ethereum, Bitcoin’s nearest competitor, has suffered a similar percentage decline since also hitting highs in November 2021. Most other smaller cryptocurrencies, which tend to follow the more well-known tokens like Bitcoin, have broadly sold off over this period as well.
The sell-off has been fast, and has hit crypto investors hard. This is also happening against the backdrop of an increasingly volatile stock market and anticipated interest rate hikes moving into 2022. So what’s a crypto investor to do?
Don’t overinvest in risky coins
Bitcoin and Ethereum are the most well known of the liquid cryptocurrencies. If you’ve been investing in the lesser-known alt-coins looking to hit a home run, just keep in mind that with higher expected returns come more risks.
You may be tempted to invest your capital into a lesser-known coin, thinking it’s about to hit the big leagues and experience parabolic growth like Dogecoin or Shiba Inu did. It’s important to remember that just as quickly as prices move to the upside, they can do the same on the downside. A lot of these coins have never recovered their all-time high prices once investor interest shifted to the next ‘big thing.’
Since new cryptos are being created all the time, a crypto project has to prove its utility and value quickly to keep its prices up.
Don’t invest what you can’t afford to lose
Digital assets are a new and exciting space. But they are still largely unregulated and there’s tremendous amount of uncertainty around how the federal government will tax and regulate these coins. A cautious approach to investing in crypto is prudent. Invest only what you can afford to lose: Don’t go beyond what could materially impact your financial well-being.
If you have the patience and conviction to hold your digital assets long term and your optimistic return expectations come to fruition, you can still come out way ahead by having them in your portfolio – even if they don’t represent the majority of your assets.
If your allocation is too high, consider whether you should take some of the risk off the table.
Put together a diversified strategy
Given how quickly new digital assets are popping up and the different use cases, now is a good time to assess the different aspects of the crypto market and whether you should invest in different pieces of it. Defi (Deregulated Finance) and the metaverse are two newer themes within digital assets that have evolved within the last few years. You may want exposure to the metaverse through coins such as The Sandbox or Decentraland. Or you may look to coins like Terra, Avalanche, or Uniswap to gain exposure to DeFi.
As with any investment, each of these new areas have their own risk and reward patterns that you should familiarize yourself with prior to investing. Marketplaces are also arising to give investors access to NFTs (Non-Fungible Tokens), which can be highly speculative. A conservative approach would be to make Bitcoin or Ethereum the core of your crypto portfolio and add these other exposures to that.
Be patient – and don’t panic
A 50% decline in the stock market would be a cause for panic for most investors. With digital assets, this type of decline is more common and has happened before. It’s important to keep that in context when investing for the long term.
In fact, without this level of volatility, the hyper-returns most crypto investors hope for wouldn’t be possible. The important thing is to maintain a disciplined approach and not sell your tokens when prices suddenly drop. Some investors follow a ‘buy the dip’ strategy, meaning they wait until a major price drop before allocating more capital to digital assets. This can reward investors over the long run, provided they keep some capital aside and look for buying opportunities.
If you believe in the transformative promise of digital assets and invest in a way that’s safe and disciplined, the recent bear market could be the perfect opportunity to fine-tune your portfolio. If you are interested in learning more about investing in digital assets, or how they may fit into your existing portfolio, please contact your Halbert Hargrove team. We are happy to help!
Disclosures:
It should be noted that investing in digital assets comes with significant risk of loss (including complete loss) that you should be prepared to bear, including, but not limited to, volatile market price swings or flash crashes, market manipulation, economic, regulatory, technical, and cybersecurity risks. In addition, digital asset markets and exchanges are not regulated with the same controls or customer protections available when investing in traditional asset classes.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
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