Traditional Retail Investors Satisfy Their Caution After Precipitous Drop in Cryptocurrencies, While Believers Double Down

Day trader Zac Hartley, in his office in Calgary, is treading lightly with his cryptocurrency investments. While he is optimistic about the future of digital assets, he says he only invests money that he can bear to lose to market volatility.Todd Korol/The Globe and Mail

It has been about a year since Evan Parubets heard a customer say the words “crypto” or “bitcoin”.

As an investment planning advisor at Steadyhand Investment Funds in Vancouver, he answered questions from a handful of clients during the bitcoin bull run in early 2021. They wondered if they should be part of the frenzy.

His advice then was the same as it would be now that cryptocurrency valuations have plummeted: tread very carefully, because it’s a speculative asset class and we don’t know what it will do.

When he talks about cryptocurrency these days, it’s an example of the type of asset to be wary of.

Cryptocurrencies were flying high during the first two years of the pandemic. But now the price of a bitcoin is down 73% from its peak of $85,000, reached in late 2021. Ether, the second most popular cryptocurrency after bitcoin, is down 71% from its peak of $6,056, to just more than $1,700. The smaller coins have seen even more dramatic drops. One of them, Solana, lost 94% of its value in just 10 months.

Cryptocurrencies at the crossroads after the annus horribilis

Despite these massive declines in value, the sentiment of market observers hasn’t changed much. Traditional advisors, such as Mr. Parubets, see the recession as further proof that the cryptocurrency boom was a speculative mania. And believers in cryptocurrencies see the current cycle as just another tough time for a fundamentally sound technology that has weathered previous market swings.

One of the latter group is Nick Kuriya, head of cryptocurrencies at Purpose Unlimited. He sees the current period as another “cryptocurrency winter,” a cycle in which assets like bitcoin dip about 70% from their peak values ​​before bouncing back and reaching a higher peak. This pattern has already played out three or four times, he said.

Purpose Unlimited owns Purpose Investments, which launched the world’s first bitcoin exchange-traded fund for retail investors. Mr. Kuriya pointed out that the company has seen a less than 0.38% drop in the value of its bitcoin holdings over the past month, even as the bankruptcy of cryptocurrency trading platform FTX has deepened the hole the holdings are falling into. cryptocurrency ratings. (The value of the fund’s assets has fallen by half since March 2021, when the price of bitcoin started to decline.)

Mr. Kuriya said there hasn’t been an exodus of investors from Purpose’s bitcoin ETF and that this is evidence that people believe in the long-term value of cryptocurrencies and their underlying blockchain technology.

He said the FTX failure is an example of bad actors exploiting the system, rather than proof of a mistake with cryptocurrencies. Such missteps are natural for new markets and technologies, she added.

But he expects cryptocurrencies’ tough year has at least one lingering downside: slower adoption by traditional investment firms and financial advisors.

“These bitcoin ETFs are not approved for sale at all brokerages at this time. … I think that certainly extended the timing,” she said.

Mr. Kuriya said he believes cryptocurrencies will come back stronger, in the same vein as companies like Amazon after their share values ​​plunged more than 90% when the dot-com bubble burst in the early 2000s.

“If you had bought bitcoin before the pandemic hit, you would have doubled or tripled your investment,” he said.

“So I find it interesting that someone can come out and say, ‘Hey, look, I told you so.’ It’s still a pretty good performing asset class when you look at the longer time frame.”

Yet there are many novice investors who have lost most of their investments after jumping on the bandwagon at the wrong times. One of them is Garrett Verbakel, a 36-year-old real estate agent in Cambridge, Ontario.

The cryptocurrency market has collapsed. They are still buying bitcoin

Before trying bitcoin, Mr. Verbakel’s only form of investment was a retirement account managed through his workplace. After being persuaded by a friend and watching videos on YouTube investing channels, he invested in bitcoin in 2021. After a few attempts to “buy the dip” as values ​​fell, he invested a total of about $3,000 .

As of early December, his investment was worth just $680, a drop of nearly 80%.

Mr Verbakel said the loss isn’t so dire, because he only put up the amount of money he was willing to part with. Now he sees the experience as a valuable lesson for when he begins to adopt a more proactive approach to investing in his retirement.

“I will invest in other forms, certainly not this one I think,” he said. She plans not to invest money in stocks and ETFs for now, considering the uncertainty in the global economy.

Even some bullish crypto investors are treading lightly. Zac Hartley, a 28-year-old from Calgary who manages his money full-time and makes TikTok videos about investing, started buying bitcoin in 2016 and made $15,000 in the recent bull run.

Mr. Hartley said cryptocurrencies make up only between 10% and 15% of his portfolio. While he’s still optimistic about the future of digital assets, he said he won’t allocate more than that. He is only investing money he can bear to lose to market volatility, he added.

“I’m more comfortable with risk than the average person, because it’s pretty much my full-time job to manage my money and please them,” Hartley said.

“For the average person, you should have 10% or less of your net worth in cryptocurrencies and you should be in for a roller coaster ride.”

In his view, the cryptocurrency crash was a fallout from inflated demand during the pandemic, when people were able to invest money because they had little else to spend it on. He said he ended up selling 80% of his bitcoin and ether holdings around Christmas 2021, before prices crashed. He considers himself lucky.

It recently began buying back bitcoin and ether, and now has about $12,000 invested in the two businesses, he said.

Mr. Parubets still chooses to avoid cryptocurrencies. He said it could take many years to find out if some digital assets are fads or if the whole system is.

He pointed out that Nortel, the classic case of a Canadian company that plummeted in value after its stock soared to incredible heights, didn’t die soon after its 2002 crash. He filed for bankruptcy in 2009, seven years after his stock plummeted. Many investors have also tried to “buy the low” with Nortel.

“He went through a very long and drawn-out death, and there was always this hope that he would come back, so the story didn’t necessarily go away,” Mr. Parubets said.

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