The crypto market is getting battered. In just the past week, Bitcoin’s price has tumbled to the lowest in a year; Ethereum’s is at its lowest level since July; and a so-called stablecoin pegged to the dollar collapsed to 30 cents.
Analysts’ advice to investors? Hang in there.
While everything crypto seems to be tumbling, its long-term potential remains positive, Bank of America global crypto and digital asset strategist Alkesh Shah said. In fact, the combined market value of the crypto sector is still much higher than it was 15 to 16 months ago, he said.
“You have had, obviously, moves of 50% during this correction, but that’s really after you had a 350% move up since January of last year,” Shah said.
The current downturn has less to do with the underlying technology behind crypto and more to do with the macroeconomic environment—specifically, increasing inflation, higher interest rates, and geopolitical instability caused by the war in Ukraine.
Inflation inched down to 8.3% in April, after reaching a 40-year high of 8.5% in March, but it is still higher than the 8.1% economists had predicted. The Fed hiked interest rates half a percentage point last week to curb inflation, and Russia’s war in Ukraine rages on, putting pressure on markets.
Meanwhile, crypto assets shed nearly $800 billion in value in a month.
Despite the economic headwinds, there is still no imminent “crypto winter,” and crypto is still in the early stages of adoption, Shah said. Though the sector’s overall valuation has been stuck between $1.5 trillion and $2.3 trillion for the past couple of months, that could change by the end of the year because of increasing signs that the government will offer some details around crypto regulations, he said.
“Our sense is that by the end of this year if we start getting some regulatory clarity, that would also give enough time for a lot of macro factors to be digested,” Shah said. “It’s possible that we start moving out of this range sometime over the next six to 12 months.”
Although cryptocurrency prices have dropped, what investors should really focus on are the fundamentals, said Adam Dell, a former partner at Goldman Sachs and the CEO of Domain Money, a stock and crypto investment platform for retail investors.
When looking for a good place to park their money, investors should look at projects as they would an emerging tech stock. Search for those that can change how business is done, he said, such as how projects in decentralized finance are looking to change financial services.
“I think it’s appropriate to think about these technologies in the same way you might think about investing in an early-stage startup if you were a venture capitalist,” Dell said. “Many of them fail, but those that succeed can yield incredibly high returns.”
What’s positive about the crypto sector for retail investors is they can get in early on nascent technology, an investing category that before was mostly reserved for venture capitalists until at least a company’s initial public offering, he said.
Yet, over the short term, the volatility of the crypto markets is hard to deny, said Kenny Estes, the CEO and fund manager at Diffuse, a fund with $15 million under management that’s focused on digital assets. Given the current volatility of crypto, Estes said he would recommend against smaller investors putting more than 5% of their overall portfolio in crypto.
Because of a lack of crypto regulation—President Biden issued an executive orde r earlier this year to study the matter—it can be easy for investors to lose money if they don’t do proper research. Investors who can’t dedicate lots of time to trading may want to hire a professional to manage their funds, Estes said.
Over the long term, he’s bullish on crypto, but what matters most is not whether a single cryptocurrency rises or falls day-to-day, it’s more about how many people are adopting or using crypto technology and the assets that are likely to increase in value based on that adoption, he said.
“I would warn people away from going and putting all of your life savings in and hoping it goes up,” Estes said. “That is just not how this asset class works.”