Taking advantage of the crypto correction
Recently the crypto-markets have been experiencing a rather heavy correction. Bitcoin went from $3,000 to $2400 and Ethereum has gone from $400 to under $300. Most major crypto-assets have also seen greater than 20% losses.
Why’s this happening?
For the last couple months the prices of cryptocurrencies have been soaring at an astounding rate, mainly due to hype and excitement in the space. Imagine a fire that’s really gotten going, now every piece of fuel you add to it seems to get it roaring harder than before. That’s basically what was happening. The fire was the crypto market and the fuel was every announcement (partnerships, conferences, legislation, tech) that legitimized the space as a whole.
Unfortunately markets aren’t like college frat houses, they won’t stay hyped forever. Eventually an underlying reality starts to catch up. The underlying reality here is that even though this is a very exciting and promising space, the technology and market it’s adoption still needs time to develop. When this realization hits the hype dies down, and the fire must be rekindled. This happens in all markets, and often gets quickly labelled as a “bubble” but really it’s just a cyclic reflection of human nature.
Large investors tend to be pretty good at recognizing the hype plateau and start to take their profits. This can lead to a substantial drop in price, which then has a cascading effect as it causes sell orders to be triggered and others to panic sell, dropping the price even more. Eventually prices level out and we end up in a lull. That’s where we are now: the rekindling phase of what we’ll call the “hype-cycle”.
So what should I do?
In investment, it’s in these quiet periods where you can find the greatest opportunity. A lot of dumb money has been shaken off and there are definitely tokens that have become undervalued because of the correction. But how do you identify them?
Since we’re in a lull phase what you want to look for are upcoming reasons to rekindle interest. The best sign of this is news that seems to say “this token is not going away anytime soon”. Legislation, partnerships, and market adoption all do this. The first two tend to get more hype and therefore will probably affect price in the short run, but the third is where the lasting value usually is. Look back at April and May and you’ll see this news was everywhere, and the price of tokens responded very well. If you’re looking to get in or want to make more money in the interim you can track the fluctuations and buy close to floors (at the time of writing the floor for ETH is around 250 and the ceiling is 300). These low hype periods are usually the best times to buy granted you assess the tests a currency faces. A test is simply an event that stresses the price of an asset, and can either make or break investor confidence. In fact, the top two tokens are both facing very blatant near term tests. For Bitcoin it’s the scaling debate, for Ethereum it’s independent coin offerings (ICO’s). We’ll talk about both in greater detail in the future but let’s just take Bitcoin’s handling of it’s scaling debate in August as an example. If the situation ends up with more hiccups and a divided community, we could see things get worse before they get better. However, if everything goes relatively smooth, then the price point of $5,000 a bitcoin doesn’t seem all that ridiculous.
For those of you already committed in investments, the common advice is to hold. This is probably the safest play, since although the recent trends may look ominous, the overall space still has massive room for growth. In fact if you’ve been watching crypto for a while you’ve probably seen situations like this countless times (look back at when bitcoin was about to break 1000). That being said even holders should pay close attention to outside news and look at the tests that your held tokens might be facing. Hopefully you’ve invested in technology you believe in, and that’ll give you the resilience to weather the storm (if there is one). However, if you need to take some profit, tracking the fluctuations and looking forward at upcoming tests is a solid way to figure out when to do so.
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