After a whole year of dark and cold “crypto winter,” this past week we’ve seen some welcome rays of sunshine. A few days or weeks of gains aren’t necessarily significant, and it’s important not to get distracted, but no one’s made of stone – it’s nicer to watch your assets going up in value instead of down, and as of now, Bitcoin (BTC), for example, is now trading at pre-FTX collapse prices.
It’s a far cry from reaching a new all-time high, but it’s progress. I mean, we already knew that crypto was going to go back up, but it’s nice to actually be able to watch it happen.
But we need to avoid getting carried away. After a year of holding on and waiting, some people might want to jump straight to thinking that this is the promised land, and it’s all gravy from here. Well, don’t. I’m warning you that getting overconfident and forgetting about the risks can lead to disaster.
It’s important to make sure that any moves you make are based on a sound strategy based on a full understanding of the big picture. When FTX collapsed, and sensationalists everywhere were calling it the end of crypto, we were right to ignore that. Now, we shouldn’t let one piece of good news throw us off the plan either…
Crypto Has Found Its Floor
I hear people asking whether the recent moves up in crypto signify “the end of the bear market.” It’s not necessarily that – and I’ll have more about the so-called “bear market” in a second – but It’s not nothing, either. It means prices are back up around the highs of late 2017.
Back in 2019, people wondered if 2017 prices were as good as it was ever going to get. In 2022, the 2017 highs are starting to look more and more like the floor.
It’s yet more proof of what I mentioned earlier this week, the fact that crypto as a whole, and Bitcoin specifically, ratchet up. They gain 1000% and then lose three-quarters of that, and still come out way ahead.
But that’s the big picture; it’s a trend we can rely on because we’ve seen it happen more than once before. And in the long term, it’s what is going to make us a fortune.
And short-term volatility will continue to play a role, whether the “bear market” is over or not – crypto is a very illiquid market. There are just fewer users than there are with more established asset classes. That means fewer buyers and sellers at any given time, and that means that prices can rise or fall much more quickly, and reverse course just as fast.
As crypto adoption grows, and more users join the space, this effect is going to die down over time.
How We’ll Cope with Volatility from Here
In the meantime, we’re living with it. Over the past day, the S&P 500 moved by about 1.5%, while Bitcoin moved by a much greater 2.19%. Less prominent cryptos have shifted even further. Cardano (ADA), for example, has moved by more than 5%.
Crypto and the broader market are still generally correlated, but the fluctuations in crypto are much more dramatic. Across that one month, the difference between the S&P 500 at its highest and lowest points is about 8%.
Across that same gulf between the high and the low for Bitcoin was about 15%. That’s because, during that time, Bitcoin spiked higher and fell lower.
I bring this up because I want to make something very clear: Cryptocurrency doesn’t have bear markets and bull markets. At least, not in the same way that equities do.
There’s always the potential for something random or unexpected to happen. Let’s be clear, Idiots in the media, and even bigger idiots who took them seriously, way oversold crypto because of FTX collapsing in early November.
But the thing is, idiots are real. The choices they make have an effect on the world. I make my calls over the long term because that’s where things average out in favor of strong fundamentals, but tomorrow? Who knows? Really, who cares?
But, at the same time that crypto took a hit because of FTX, the S&P 500 was actually gaining. Crypto can go its own way because of the ideas circulating around in crypto world.
That’s why it’s too early to celebrate. Because anything could happen tomorrow. Some kind of thing will happen at some point.
And eventually, it will all even out, and the strongest assets will win. That’s why we need to stick to the fundamentals, and the 5Ts I use to measure them.