Crypto is feeling the market heat. Here’s what you should do

Cryptocurrencies are getting sucked into the broader market turbulence, but financial advisers are urging anxious investors not to panic.

Bitcoin briefly fell below $30,000 on Wednesday, its lowest level in nearly a year. Shares in Coinbase Global, one of the largest crypto exchanges, slumped to a record low after it warned of slowing trading volume. Even coins pegged to the US dollar are feeling the heat, reigniting a debate over the value of algorithmic stablecoins.

The turmoil is a good time for investors to rebalance their portfolios, and perhaps get a better handle on which coins may or may not have long-term value, advisers say.

“Bear markets are typically a great time to accumulate the coins you have long-term conviction in,” said Gritt Trakulhoon, lead crypto analyst at investing app Titan. “It’s a tough market for sure, but it’s a good time to strategise.”

Billionaire entrepreneur Mark Cuban tweeted Monday that crypto is in a situation similar to the dot-com bubble, when speculation sent the shares of several internet-centric companies surging, only to eventually bottom out.

While a bubble burst may not be inevitable, investors should focus on tailoring their portfolios accordingly with a long-term strategy that takes into account at least a three-year time horizon, Trakulhoon said.

Inflation hedging
Bitcoin fluctuated Wednesday after US inflation data showed steep consumer price increases continued last month. The coin fell as much as 6.2 per cent to $29,085, touching its lowest level since last June, before regaining some ground. It’s now lost more than half its value since hitting a high in November.

The dip once again raised doubts that Bitcoin functions as a hedge against inflation, a characteristic often touted by supporters of the coin, who argue that its fixed supply of 21 million units will resist devaluation. Instead, the cryptocurrency has largely tracked the Nasdaq 100 index of the largest tech stocks, which are notoriously sensitive to rising prices.

Matt Hougan, chief investment officer of Bitwise Asset Management, argues that Bitcoin is both a risk asset in the short term and a hedge against inflation in the long term. The price drops make sense during risk-off markets, because investors tend to discount assets whose value lies primarily in the future, said Hougan.

“Bitcoin is not fully mature, and investors allocating to Bitcoin are betting in part on a future outcome where it is widely accepted as a store of value like gold or evolves into other mainstream use cases,” Hougan said.

Crypto portfolio
A volatile market is a good time for investors to convert alt-coins into blue-chip coins that are less risky. Titan’s Trakulhoon said investors should stick with cryptocurrencies they believe have strong fundamentals and longevity.

“At this point, being slightly more concentrated on the coins you have strong conviction in is better than being diversified in altcoins that you don’t really understand,” Trakulhoon said, adding that 90 per cent of coins “won’t recover.”

“They will simply die — but the ones that do survive will thrive,” he said.

Crypto’s slide may get uglier. But any further slumps are a good excuse for investors to rebalance their portfolio and make sure they’re not overexposed to crypto. Based on the risk appetite of each investor, it should be anywhere between 5 per cent to 10 per cent of your total portfolio, said Eliézer Ndinga, director of research at 21Shares & Amun, which offers crypto exchange-traded products.

Stablecoins
Algorithmic stablecoins are being tested too. They’re pitched as a way to cut through the chaos of crypto by pegging their value to the US dollar or another reserve asset.

However, the TerraUSD stablecoin plunged to 45 cents on Wednesday rather than trading at $1, as designed. The backers of the TerraUSD algorithmic stablecoin are trying to raise about $1.5bn to shore up the token.

The episode is a good reminder for investors to rebalance their portfolios and make sure that any stablecoins they hold are fully collateralised like Tether’s USDT and Circle’s USDC, said Ndinga.

“It is best to have exposure into fully collateralised stablecoins in case there is a bank run, at least the investors are able to redeem actual dollars that are healthy,” he said.

NFTs
Market sentiment has affected all parts of the crypto markets, including non-fungible tokens. The average daily transaction volume on OpenSea, the largest NFT marketplace, was down more than 34 per cent from January to May, according to crypto data-tracking platform Dune Analytics. Active users on the platform dropped 51 per cent.

This market turbulence is the first real bear-market cycle for NFTs, making it more difficult to ascertain where prices are headed, said Zachary Friedman, chief strategy officer of Secure Digital Markets. For investors looking for NFT projects that are resilient and can prove they have strong fundamentals, this turbulence can be a good time to restructure your portfolio.

“In a bear market you have more time to actually do due diligence and assess a project’s competency versus when things are flying and you are motivated by fear of missing out,” Friedman said.