The big fall in crypto prices on May 19th followed by a very large rebound the next day has kept markets busy and made global headlines. And since the initial bounce back, trading remains volatile and new lows are being made. Regardless of whether you have a position in crypto or are simply considering owning bitcoin or other cryptocurrencies, here are some perspectives to consider.
Leverage in crypto is a risky business, and can have negative consequences
While the initial catalyst for a fall in crypto prices seems to have been Elon Musk’s announcement that Tesla would no longer accept bitcoin as payment for its products, leverage in the market and comments from China around proposed restrictions for Bitcoin further exacerbated the large falls.
On Wednesday 19th May (Australia time), Ethereum fell by over 40% and Bitcoin by 25%. The abrupt and sharp selloff saw many leveraged positions closed globally, close to $10bn of margin in a matter of hours, meaning that these accounts were forced to sell low because they could not afford or did not want to maintain their positions. Those who were forced sellers at the recent lows missed the positive rebound in the following 24 hours.
Total returns are relative to your buy price
The falls in crypto were extreme for a one day move. However, for investors who had been investing periodically in these assets over time, they have enjoyed exceptional returns in recent months, and over the course of several years. While it was a bad day for any crypto investor, many of those who had held for longer periods can still report healthy returns on their accounts. This does not suggest that they should enjoy losing on that day, but that during their investment lifecycle, there are going to be negative days, some of them larger than others.
It appears the investors who may have got hurt the most from these falls were the ones with leveraged positions buying aggressively near the recent highs, meaning that they were buying with money they did not have to provide upfront, but then needed to find the money when markets fell, therefore being left with little or no choice but to sell and create a feedback loop amongst others that were faced with similar predicaments.
This means they were the ones forced to sell low, possibly lower than they bought, because they may have purchased more than they could afford at the time, a common reason to use leverage. It also means because they may have done their buying in one go, they may have lost the ability to dollar cost average on the way down over time.
Saying all this, there is limited information about the amount of leverage in the crypto market. Given these are not monitored by the regulator, we are basing these statements on recent analysis by various news outlets, which can be highly inaccurate.
Timing is everything for a short-term trader, whilst time in the market is everything for a long-term investor
There are many investors who have a strong conviction when it comes to crypto, but the prices are very volatile. Historically, crypto has shown itself to be much more volatile than equities. Crypto does not have anywhere near the same amount of regulatory oversight as equity markets and it is much more susceptible to “fake news” due to the lack of regulatory environment.
The trick is to invest only what you can afford to lose entirely, and ideally not to buy all in one go, because you never know when the crypto market will go up or fall. If you strive to invest with a longer-term focus, then big moves in either direction hopefully will not define your investment performance over its lifetime. Check out our blog on time in the market to further understand why attempting to time the market can prove both difficult and costly.
Don’t have the Raiz App?
Download it for free in the App store or the Webapp below:
If you have read all or any part of our email, website, or communication then you need to know that this is factual information and general advice only. This means it does not consider any person’s particular financial objectives, financial situation, or financial needs. If you are an investor, you should consult a licensed adviser before acting on any information to fully understand the benefits and risk associated with the product. This is your call but that is what you should do.
You may be surprised to learn that RAIZ Invest Australia Limited (ABN 26 604 402 815) (Raiz), an authorised representative AFSL 434776 prepared this information.
We are not allowed, and have not prepared this information to offer financial product advice or a recommendation in relation to any investments or securities. If we did give you personal advice, which we did not, then the use of the Raiz App would be a lot more expensive than the current pricing – sorry but true. You therefore should not rely on this information to make investment decisions, because it was not about you for once, and unfortunately, we cannot advise you on who or what you can rely on – again sorry.
A Product Disclosure Statement (PDS) for Raiz Invest and/or Raiz Invest Super is available on the Raiz Invest website and App. A person must read and consider the PDS before deciding whether, or not, to acquire and/or continue to hold interests in the financial product. We know and ASIC research shows that you probably won’t, but we want you to, and we encourage you to read the PDS so you know exactly what the product does, its risks and costs. If you don’t read the PDS, it’s a bit like flying blind. Probably not a good idea.
The risks and fees for investing are fully set out in the PDS and include the risks that would ordinarily apply to investing. You should note, as illustrated by the global financial crisis of 2008, that sometimes not even professionals in the financial services sector understand the ordinary risks of investing – because by their nature many risks are unknown – but you still need to give it a go and try to understand the risks set out in the PDS.
Any returns shown or implied are not forecasts and are not reliable guides or predictors of future performance. Those of you who cannot afford financial advice may be considering ignoring this statement, but please don’t, it is so true.
Under no circumstance is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz Invest or Raiz Invest Super.
This information may be based on assumptions or market conditions which change without notice and have not been independently verified. Basically, this says nothing stays the same for long in financial markets (or even in life for that matter) and we are sorry. We try, but we can’t promise that the information is accurate, or stays accurate.
Any opinions or information expressed are subject to change without notice; that’s just the way we roll.
The bundll and superbundll products are provided by FlexiCards Australia Pty Ltd ABN 31 099 651 877 Australian credit licence number 247415. Bundll, snooze and superbundll are trademarks of Flexirent Capital Pty Ltd, a subsidiary of FlexiGroup Limited. Lots of names, which basically you aren’t allowed to reproduce without their permission and we need to include here.
Mastercard is a registered trademark and the circles design is a trademark of Mastercard International Incorporated.
Home loans are subject to approval from the lending institution and Raiz Home Ownership makes no warranties as to the success of an application until all relevant information has been provided.
Raiz Home Ownership Pty Ltd (ABN 14 645 876 937), an Australian Credit Representative number 528594 under Australian Credit Licence number 387025. Raiz Home Ownership Pty Ltd is 100% owned by Raiz Invest Australia Limited (ABN 26 604 402 815).