It’s been a rough couple months for Bitcoin, and most cryptocurrencies. Should crypto investors sell out, in anticipation of another leg down? Or should they buy the dip? First things first: each investor needs to know their own portfolio goals, and their personal risk tolerance. Next, we can get to the crypto investment thesis–and what to do during a bear market.
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Coming soon.Top or bottom? Traders at odds over whether Bitcoin will keep rising: “Bitcoin (BTC) touched $44,000 a second time on Jan. 12 amid increasing divergence of opinion about whether the price bottom is “in.”” (CoinTelegraph)
BTC Hovers Near Critical Support: Markets Wrap: “The market is now pricing in a good chance of three or four rate hikes in 2022.Yields on government bonds have been soaring higher as the market expects a less accommodative US Federal Reserve. The US dollar has shown strength over the past few months, a headwind for digital assets.” (BlockWorks)
Bitcoin, Ether Prices Fall Along With Tech Stocks: “Cryptocurrencies led by bitcoin and ether slumped as part of the broader tech selloff, cementing their status among investors as risky assets quickly dumped in moments of market stress. The falls were triggered by Federal Reserve minutes that showed officials are eyeing a faster timetable for raising interest rates this year. As rates rise, holding volatile investments that produce little income becomes less attractive compared with government bonds.” (WSJ)
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Cryptogic is THE show for crypto investors who are focused on long term results. Follow Scott Hawksworth and Andy Hagans as they explore the investable world of blockchain technology, NFTs, Bitcoin, Ethereum, and other cryptocurrencies.
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– [Scott] Hello, and welcome to another episode of Cryptogic. I’m your host, Scott Hawksworth, once again joined by Andy Hagans, co-founder of Cryptogic, co-founder of the Alternative Investment Database. And today, we’re going to be talking about bear crypto markets. What do you do? How do you navigate that from an investment perspective because…
Have we been in a bear market? Maybe. Because over the past few months, cryptocurrency as a whole has seen some declines. And just to kind of frame this, I’m just looking at Bitcoin’s price right here on CoinDesk. And as of November 8th, 2021, we were at $67K.
Fast forward, just a few months later, January 7th, $41K. So, there’s been a bit of a pullback here. And Andy, it’s undeniable that we’ve seen some declines in crypto recently here. What’s your take on maybe the causes behind this?
And are we in a bear market?
– [Andy] Well, yeah, that’s a good question. I mean, I think whether we’re in a bear market is really actually a technical question if we’re using the same definition that would apply to the stock market. But I think the larger question and, really, most people want to know is, where’s Bitcoin going to go from here?
Where is Ether going to go from here? Is it going to continue to go down? Is it going to bounce back up? Are we going to be sideways, in a consolidation phase? Short answer, I don’t know, Scott. I mean, if I were a betting man, I might bet that it’s going to do exactly what you don’t expect. But in all seriousness, you know, we may just be in a consolidation phase for a while because, you know, as more institutional investors enter the game, they may be a little bit more disciplined in terms of buying the dip, but then also selling to lock in gains.
So, I think what we’ve seen over the past several years is…especially Bitcoin has actually gotten a little bit less volatile. I mean, it’s still highly volatile compared to other forms of, you know, assets, but it’s a little bit less volatile. It’s starting to move more in tandem with just that greater stock market.
So, I think part of what’s going on, you know, the Fed, this big 800-pound gorilla that dominates the bond market, they’ve signaled that they’re going to raise interest rates and I think the market is pricing in that they’re going to raise them three or four times in 2022. So, that’s affecting the stock market and I think we’re beginning to see that crypto is reacting just like the stock market or at least like the tech sector of the stock market.
So, I think some people are probably a little bit bemused by that, you know, like, “We thought this was an alternative asset, why is it starting to behave more and more like a traditional asset?” And the other interesting thing is that the CPI just hit 7%. We just got that print this week.
Wow. And I think a lot of people are saying, “Well, that’s not even the true inflation rate. The true inflation rate is a lot higher than 7%.” And can we just take a second to say, like, wow. I was born in 1983. And I believe the last time that inflation rate exceeded 7% was not even in my lifetime, right? I’m almost 40.
So, that was 40 years ago. So, that’s a real incredible feat that folks in Washington, D.C., have managed to…
– Well done.
– Yeah, well done. Yes, exactly. Well done. Maybe the Bank of Japan should be taking notes because, you know, they’ve been wanting higher inflation like this for, what, 30 years. But it’s kind of interesting because, you know, we were thinking…a lot of people have been thinking, well, Bitcoin is this ultimate inflation hedge and now, they’re going, “Oh, wait, what’s going on?” Because Bitcoin has been dumping and the CPI has been juicing it up to 6.5% to 7%.
So, things are moving a little bit different, a little bit unexpected. So, I would say expect the unexpected. Whether or not we’ll continue to see, you know, crypto hang out where it’s at, frankly, Scott, I’m just not in that business of predicting exactly where, you know, a particular cryptocurrency is going to be in three months.
I don’t have a crystal ball.
– Yeah. We’re not Nostradamus on the show.
– But my theory… Yeah, exactly. But I do believe that as more institutional investors enter the space and begin to allocate to this space, the volatility will, over time, gradually decrease. Now, you should still expect this asset class to be highly volatile. Right?
If you weren’t around in 2015, 2016, 2017, 2018, 2019, you know, you may not realize just how volatile it could be, but I don’t think we’ll ever return to quite that level of volatility. So, I mean, I think it’ll be like a bumpy ride, I guess, is what I’m saying. It’s still over that very long-term time horizon. I expect the volatility to go downwards.
And I do think it kind of makes sense that the crypto is going to start to behave and track a little bit more like that broader stock market. Now, as far as what the broader stock market, what are they pricing, and what are the market’s pricing and with inflation and with bond rates? Well, I think the market is pricing in that the Fed is going to raise interest rates two, three, or four times next year.
But I think they’ve gotten addicted to this, you know, quantitative easing, and if the stock…
– How long has that been going on, right?
– Yeah, exactly.
– They are absolutely addicted.
– It’s permanent now. It’s a permanent fact of life. And I think, you know, they’ll try and get inflation under control a little bit. And I don’t think that inflation, at least the official numbers, are going to continue to shoot up. We’re not going to see 12%, 15%, 20%. If we do, that will shock me.
But I think what will happen, as they raise rates, if the market dips very much, I think they’re going to get cold feet. I think they’re going to go limp and they’re going to go, “You know what? We need to reverse course.” So, I don’t see, like, a ton of interest rate. Even if you consider what our national debt is, our country can afford to be paying high-interest rates on our debt.
So, I doubt that they’re going to raise interest rates very much. I think they’re going to take a crack at it, though. So, I could see Bitcoin, I could see Ethereum, I could see, at least, you know, the major coins tracking a little bit more towards that broader market, which I think is frustrating for some people, but it is what it is.
Observe and learn.
– Right. And when you’re talking about the Fed potentially raising interest rates, you know, does that strengthen the dollar? And how does that potentially impact, you know, Bitcoin’s price and how investors might be looking at cryptocurrencies? Because I think that…you know, we were just talking about the inflation side of things.
I think there’s this belief that while a weaker dollar is good for crypto, a stronger dollar is actually not as good for crypto. And I’m just curious to your thoughts on that.
– Yeah, absolutely. And I mean, it kind of looks like the market is pricing in that they think the Fed will get inflation under control, that we’re not going to have runaway inflation. And of course, as interest rates go up, bonds become relatively more attractive to own. Now, the thing is, if the rate on a 10-year, let’s say, goes up to 2% or 2.5%, and then let’s say the CPI, you know, maybe peaks at 7 and gets back down into the 5s, those are still negative interest rates on a real basis.
Right? But the thing is, I think the market believes in the very long-term, let’s say, you know, 7, 10 years or longer. That deflation may be more likely than inflation, that we may be in this, you know, longer-term secular cycle of deflation because of all of those things that we’ve talked about and in past shows, you know, high debt, low birth rates and
[crosstalk] Technological innovation and productivity gains. And this is a good…for me, it’s a gut check because if you had some assumptions about Bitcoin and about Ethereum and about how they move, and then it turns out that your assumptions are incorrect, it’s a good time to gut check, you know, “Why am I in crypto? What is my investment thesis?”
It’s okay to ask those questions. Actually, you need to know the answers to those questions. The time that you really need to know the answers to those questions is in the bear market. So, whether we’re in a longer-term bear market or not, those are great question for a crypto investor to ask himself or herself.
– Right, yeah. I actually want to tease that out a bit more, Andy, because, you know, that’s really kind of the thesis of this or the big subject of this episode is, you know, how do you navigate that bear market in crypto? And you were talking about a gut check. I mean, if you could expand a bit more, from a crypto investor perspective, what should they be thinking about?
And if they’re seeing… Maybe they got in back in November and they thought it was going to just keep going to the moon and they were excited about it and now, it hasn’t quite gone that way. What are some of the big questions and things to really consider from that investor perspective?
– Yeah. And I mean, investors who got in at the peak and have now ridden it on the way down, I just say, welcome.
– Welcome. I hope you have your seatbelt fastened.
– Yes, exactly. There’s a graveyard of folks who got into crypto when they see a run-up, and then, you know, they sell out on the way down. So, it’s really the bear markets are honestly where the real money is made is in the bear market. But to answer that question, how to navigate a bear market, I like to zoom way, way, way out.
And I should also say, I’m not a financial advisor and this is not investment advice. I’m talking about general…
– Conceptual financial advisors.
– Exactly. I don’t want our lawyer to lecture me later.
– I’ll have to deal with it. You don’t worry. I’ll get on the phone with him.
– All right. But the framework, okay, the big framework. Every investor, crypto or not, you have to start with your overall goal as an investor, your portfolio goal. So, you want to look at your time horizon and your risk tolerance. And what’s your overall goal for your overall portfolio, so including stocks, mutual funds, ETFs, bonds, gold, hard assets, Bored Apes.
You know, everybody’s got…I’m kidding.
– Not everybody has a Bored Ape allocation, but if you do, that’s great. So, zoom out, and step one, what’s your portfolio goal? Because you need to make sure that your portfolio is constructed to meet your goal, right? It’s no good to have a specific goal, but then you’re just buying any kind of stock or crypto coin that, you know, piques your interest or whatever.
It’s a disorganized way to go about it. So, you start with that goal. Then generally from there, you’ll come up with your overall asset allocation. And usually, in my line of work, I’m mostly working with accredited investors, and so, you know, things might be a little different for non-accredited investors. But for a lot of accredited investors, I recommend that they have, you know, roughly 10% of their portfolio in alts.
Maybe a little less if they’re not interested in it, maybe a little more if they’re very interested in alts. And then a portion of those alternatives, investe it in crypto. So, when you kind of zoom out like that and you say, “Okay. An accredited investor may have 10% of their portfolio in alts,” and then, you know, maybe 1% or 2% total in crypto, which is, you know, 10% to 20% of that alts slice, that’s already…
It’s an amount of money that’s in the context of that larger portfolio that I think allows you to ride out a bear market a little easier versus if you have your entire life savings in crypto and it’s money that, let’s say, you need.
It’s money that you need in a time horizon of two or three years. Well, guess what? You can’t actually afford the volatility that you might see in crypto. So, again, step one is just zoom out, overall portfolio goal, overall asset allocation. I love crypto, but I like stocks too. I even own some bonds, you know, guilty as charged. So, it’s okay to have that balanced portfolio.
We’re not going to make fun of you at Cryptogic for being a disciplined investor.
– Absolutely not.
– Right. So, now, we have our allocation. Okay? And within that allocation, if there’s a bear market, I think it can be quite simple and it can just be an opportunity to rebalance and buy the dip. And as I said, you know, you make more money during a bear market if you’re buying during bear market than if you’re buying at the top of the bull market.
So, if you have that top-down, big picture approach, to me, it’s way, way easier to just stomach the volatility and to look at it like, “Oh, Bitcoin’s on sale,” versus, “Oh, Bitcoin is dumping.” Right? Same price movement, but two different mental frameworks. So, if you’re in your 20s or 30s or 40s or 50s or 60s and you’re a saver, you know, if you’re not in the stage of your portfolio where you’re just spending it but you’re actually still saving, then it’s good when stocks go on sale, it’s good when crypto goes on sale because then you’re buying it on sale, right?
Just like when the housing market tanks, well, if you’re not a homeowner, but you want to buy a home, that’s great news, right? Houses just went on sale. So, you have to look at it, are you a net buyer or a net seller? If you’re a net buyer, it’s a great thing when these coins become more affordable. I think what trips people up, Scott, is when they…
And I’m guilty of this as well throughout my investment career. We’ve all fallen into this trap, right, where you hear about something and it’s exciting, whether it’s a stock or a coin, and you go out and buy it, but looking back now, it’s part of your portfolio and you’re like, “Shoot, I don’t even know why I own that anymore. I don’t even remember…”
– Right. Why did I bring that in?
– Exactly. And you might not even remember why you bought it in the first place. Or let’s say, maybe you do remember what your thesis was and your thesis has changed. Right? So, maybe you bought crypto as an inflation hedge. Now, you still want to own it, but you realize your investment thesis behind it maybe has shifted somewhat.
And that’s okay. I think in a bear market, it’s really, really important for you to be honest with yourself and say, “What is my investment thesis in crypto? And which tokens, which coins do I want to buy that reflect that thesis?” And you have to have a strong thesis that you truly believe or a bear market is likely to shake you out. You’re likely to panic sell at or near the bottom.
So, I think it’s a great time to just reflect, read up, study. And quite honestly, if you have some holdings that you don’t have any conviction behind anymore, liquidate them and use that money to buy something where you do have conviction because that conviction is so, so important during these periods of high volatility.
– Absolutely. And Andy, you mentioned so many great things to consider. If I were to sum it up, so much of this is also about just taking that emotion out of it because, again, I think we all fall prey to it. It can be so exciting when you check the numbers and you’re like, “I’m up. I’m up big.”
And if you’re riding that wave, that’s where you can make decisions that aren’t the soundest decisions to be made for your portfolio. And you can have that hesitation and that uncertainty and you can get away from, “Well, what was my thesis? Why don’t I believe this now?”
And especially when we’re talking about the crypto market, you know, you were saying, “Hey, buckle up.” Yeah, buckle up because it’s still volatile and that volatility has decreased somewhat, but it’s still quite volatile. And if you don’t have the stomach for that, if you can’t look at it with that conviction that you’re talking about, Andy, then you’re going to really risk losing out in a significant way.
And that’s just… It’s okay if crypto is not for you based on that alone, right?
– Yeah. And I mean, I think very few people have the stomach to put, let’s say, half of their portfolio in such a volatile asset regardless of the long-term returns. Very few people can psychologically handle that. I mean, I can’t. If I had half my portfolio in Ethereum or Bitcoin, I’d have trouble sleeping at night, right?
– Yeah, of course.
– I believe in that diversified portfolio. And, you know, personally, for me, crypto was part of that diversified portfolio. So, I would say very few people… I think a lot of people can handle that volatility when it takes up the correct slice, the correct allocation of the overall portfolio. The problem is is when it becomes too big to psychologically handle, right?
I mean, that honestly is a big part of the value of the old 60/40 stocks and bonds. They’ve done all sorts of mathematical modeling about, you know, risk-adjusted returns, and blah, blah, blah, blah, blah. But a big part of the benefit is really simple, it’s just that 40% that you have in bonds as ballast, and then when the stock market dumps, it just psychologically helps the investor to, number one, weather it psychologically. but number two, also have a little bit of dry powder to rebalance, right?
So, you can always rebalance and buy stocks on the cheap. So, I think it’s… Again, I own some bonds, obviously. They don’t pay much, you know, during this era of, you know, 7% inflation. But to me, it’s always…it’s just… It’s been very, very important to hold that balanced portfolio.
And, you know, I really got started in the market in the mid-2000s, when I was a lot younger. And I remember having, you know, 90% or more in the stock market and then going through the 2008 crash and realizing, okay, I don’t have the fortitude, the intestinal fortitude to have 90% plus of my portfolio in the stock market.
So, since then I haven’t, but I have noticed, since then, whenever the market has dipped, I’ve been able to use that as a buying opportunity in buying the dip and actually say… I kind of learned that lesson the hard way, thankfully with a pretty small amount of money because I was in my early 20s and I hadn’t saved much or invested much, so I was able to learn that lesson early and be a lot more disciplined since then with that balanced portfolio model.
So, for me, the crypto allocation just needs to fit into that larger model, and then this all becomes a lot easier.
– Absolutely. And one thing I’d add too, and this is just for me, personally, I’m long on crypto. So, I don’t get into the active. I don’t actively manage as aggressively as some might. And one reason I do that is that helps me. It helps me to set and forget and say, “Well, I’m long on this, so I’m not going to get too bent out of shape on the price fluctuations of Bitcoin over the last month because I’m just holding Bitcoin and it can do whatever it wants.”
– In the Gold Bug world, they’d call you a stacker, right? You’re just… Just every month, I go to the store and I buy an American Gold Eagle or whatever it is. And I think if you can take that philosophy to Bitcoin and Ethereum or whatever coins that you’re investing in and dollar-cost averaging and just be disciplined and buy a little bit here and there over time, I think that’s a great way to look at it because, ultimately, that’s what investments are, right?
They’re savings. And so, you know, I think, Scott, that’s a fantastic way to look at it. And I will say one other thing. The link you sent me from The Wall Street Journal talking about how, you know, when interest rates ris e and when bond yields go up, these other assets that don’t yield anything such as gold or crypto, according to the article, crypto, they become relatively less attractive.
And that’s true. But I think one thing that has really changed in the past two or three years is a lot of investors are earning yield on their crypto. Either you can be staking your Ethereum, earning 4% or 5%, 6%. You can be lending it. I mean, on some of these lending platforms, people are earning over 10%. But frankly, you don’t even need to take that much risk.
And even if you can earn a couple hundred basis points of yield with your crypto, you’re already equaling the type of yield that you’d be getting in the bond market. So, I do think that that is a structural shift in the crypto world that makes crypto, just in general, a more attractive asset class to hold because there’s so many options for yield now.
And honestly, we actually should make that a topic for a future episode or a series of episodes because I’ve had some actual listeners send me a personal request, “Andy, can you talk about how to allocate my crypto to earn yield?” So, I think that’s a topic that we want to cover.
But quite frankly, there’s a lot of opportunities. Even if bond yields go up a little bit, I think there’s a lot of opportunities in the crypto world to earn more yield than what the bond market currently offers. So, we’ll see. That might actually be a nice little tail win for crypto. And I don’t see Bitcoin, you know, revisiting the lows from…
I don’t see Bitcoin going back below $30K, $20K, you know, God forbid, $10K. I don’t personally see that happening. I guess it’s possible. So, I think there’s just more support now, both from institutions and from investors realizing they can earn yield and it’s just a more attractive asset class for that reason.
– A hundred percent. And I tell you, if that were to come to pass, I think there are a lot of people, myself included, who would be really excited to go out and buy some.
– Yeah, buy the dip. Right?
– Exactly. Exactly. Andy, thank you for joining me and offering really so much insight on this. It can be tough to… Whether it’s a bear market or not, it can be tough to see those numbers going down, but I think there’s a lot to be said about just gut-checking. And it’s okay to take some time and gut-check. And if you come up to some different conclusions, then make those decisions, right?
– Yeah, and if it turns out you’re not an ape like us, that’s okay.
– Exactly. Exactly. Well, thanks again, Andy. And of course, we will have the links to some of the articles we mentioned in our show notes at cryptogic.com. And that’s where you can see all of our other episodes on Cryptogic and stay tuned because there’s a lot more that we’re going to be talking about.
Andy, I think you just teased perhaps a future episode here talking about yield. So, looking forward to it.