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Aug 10, 2022
Recent crashes in crypto markets have led many investors to pull back from digital currency. Is that the best plan — or is now the time to “buy the dip?” This begs a fundamental question: What makes crypto valuable in the first place?
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It’s been a tough year for crypto investors. Bitcoin, the world’s flagship digital currency, is down about 65% from its all-time high price of $68,990 in Nov. 2021. Meanwhile, if you purchased digital currency through the Celsius or Voyager lending platforms, your assets are currently frozen while bankruptcy filings proceed. Sounds like a good reason to stay away from these volatile assets, right? Maybe not.
Crypto markets are like other markets
If you overlay the yearlong trendline of the S&P 500 stock exchange with the price of bitcoin over the same period, you’ll notice that they move together — though bitcoin is more volatile, with higher peaks and deeper troughs. In other words, crypto markets aren’t isolated from larger economic trends.
MarketWatch has compared the current dynamics of crypto markets to the Nasdaq stock exchange in the early 2000s, when some of the first internet-based businesses were overvalued and went belly up. Digital currencies, in addition to demonstrating the same general trends as stock markets, are a relatively new animal. And as with the dot-com bubble, some over-hyped crypto assets will tank, while others will soar.
Does that mean it’s better to stay away from crypto until things are more stable? That’s the tack that skittish investors are likely to take, while others will shop the sales.
Bitcoin is (still) on sale
Everyone wanted a piece of bitcoin when the price was north of $60,000, but now that it’s around $22,000, many people aren’t sure — even though, mathematically speaking, it’s two-thirds cheaper than it was at its peak. Experts are already warning that this sale won’t last forever. Bank of America has found that market dynamics over the past month indicate that crypto markets are returning to “bullish.”
This merely underscores that crypto investing is like other types of investing. Buying when markets are down requires the guts of a contrarian, and the nerves to hold on if and when prices dip further.
Maybe it’s all a bubble
Perhaps people are crazy to put their money in assets that are just strings of numbers on the blockchain. Why were digital currencies ever considered valuable?
That’s a reasonable question. The answer may surprise you.
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The recent collapse of certain crypto platforms did something more than underscore the risks of investing. It highlighted some initiatives that have retained their value even through the market turbulence.
The Proof Collective is a members-only group of artists and creatives. It launched a non-fungible token (NFT) that has grown in popularity because there is a community of people associated with it who buy, hold or trade their tokens, while also hosting and attending events in real life — IRL — not just on the internet. For a new currency to gain value, there needs to be a group of people who believe in it.
“Ultimately, decentralization relies on a community of people,” says Noah Thorp, CEO of Upside, a global Web3 company that specializes in token launches. “Decentralization” refers to currencies that are not controlled by a central government, like the U.S. dollar.
Bitcoin is valuable because there is a global community of people who believe in the currency and what it can become. And other digital currencies gain value when there’s a community buying the coin or token because they believe in it — something more than owning it just to own it.
“It is community use that determines the long-term [value of] tokens and NFTs,” Thorp told OZY. “Projects must create assets that the community values long term.”
Big opportunity, maybe
While it’s not legal to print your own money, it is legal to generate your own NFT that can function as money within a given community. And that creates considerable opportunity for those who buy in early to a currency that ultimately grows a following and becomes successful.
What’s clear is that crypto markets aren’t going anywhere. And recent market dynamics have offered some important lessons about what makes for sound or unsound investing in these spaces, for those who soldier ahead.
Many of the recent horror stories of crypto investors losing everything involved those who bought digital currency on margin — meaning, with borrowed money. When prices fell, they went underwater.
Meanwhile, those who put their trust in Celsius or Voyager are also facing the possibility of losing everything. So let’s take a closer look at the risks of using certain crypto platforms over others.
Advanced topics in calamity markets
Both Celsius and Voyager are what are known as “custodial” platforms. As with traditional banks, investors deposited funds into these digital platforms and believed they would be able to withdraw their money at any time. (Coinbase, Binance and other major crypto exchanges are also custodial.) As Voyager and Celsius have now filed bankruptcy, account holders have lost access to their money for the time being, though bankruptcy proceedings may ultimately result in repayment.
Some crypto enthusiasts directly hold their digital currency without an intermediary platform, citing a famous, almost cult-like saying: “Not your keys, not your crypto.” In other words, they hold their own “keys” — which, in the case of bitcoin, is a string of code secured with 256-bit encryption. Holding one’s own keys carries other risks, however. If you lose your keys, you lose your crypto.
A middle way
One approach worth considering, says Thorp of Upside, is to store your digital currencies in several places. “If you’re interested in owning crypto, hold some of it on custodial platforms and hold some of it directly, thereby spreading around your risk,” he told OZY.
If this approach appeals to you, consider an app like Ember Fund that helps automate buying and diversifying across currencies. Ember is non-custodial; you hold your own keys. You might also consider app M1 Finance, which performs similar functions but is custodial.
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