The last 48 hours has been a volatile ride for cryptocurrency investors.
Some of the less well-known cryptocurrencies have fallen even further. Byteball has collapsed in value by 33.2%.
And Bancor, which only recently completed its initial coin offering (ICO) last month, is already down 20.3%. Not a great start for early investors.
What’s behind the decline in cryptocurrencies?
A broad-based fall such as this suggests a natural pullback based on the strength of recent price rises. Like all markets, cryptos go through periods of irrational exuberance and unjustified despair.
And as this field is highly complex and uncertain, the volatility is higher than any other investible asset class.
However, there are also a couple of big fundamental stories playing out across the two leading names that are contributing to the falls.
First, the Bitcoin scaling debate is heating up, with two or three counter proposals competing for support from the community.
These issues will resolve themselves one way or the other. Then, as always, the Bitcoin project will continue to move forward.
But, in the short term, sharp falls can cause weak holders to fold quickly.
Litecoin appears to be the biggest winner of this in the short term, and it’s one reason the price is holding up comparatively well.
Secondly, the recent rapid rise of ICOs using Ethereum to fund their projects. As the ethereum price falls, it seems to be causing a cascading volume of ethereum selling as the newly-minted companies seek to preserve the funds they have just raised. Most are probably just converting ethereum into US dollars to protect their development funds from value erosion.
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Despite short-term volatility, the one-year gains in this sector have been phenomenal. In fact, Bitcoin is the best performing ‘currency’ year-on-year since 2010 (except 2014) on an annual basis.
And, behind the scenes, big players are starting to move.
This headline from Forbes (12 July 2017) says it all:
‘Crypto Boom: 15 New Hedge Funds Want In On 84,000% Returns’
Even more managers are sitting on the sidelines waiting (or hoping) for a major market correction to allow investing at lower levels.
If and when this money comes in, we could see some big rises towards the end of the year.
The key thing to remember is that this technology is still at the early stages of its development and, unless you are a skilled (and very brave) trader, the best approach might just be a buy and hold 5–10-year strategy.
If you can’t handle volatility, it simply might not be the right investment for you. Alternatively, only invest small amounts at this early stage, and money you can afford to lose.
For those on the other extreme, today’s panic might be tomorrow’s smart buying opportunity.
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