As Crypto Plunges, Is Now the Time to Buy?

Leading cryptocurrency Bitcoin (CRYPTO:BTC) has fallen 8.59% over the past five days — a move that’s brought the leading digital asset to a monthly loss of nearly 10%.

Now, compared to other asset classes, crypto as a whole has been on a tear thus far this year. Bitcoin’s recent turmoils haven’t necessarily overshadowed this asset’s more than 57% year-to-date (YTD).

So the question is really whether this near-term momentum shift is one that will continue, or if bulls will step back into the driver’s seat and start buying again.

Let’s dive into what’s going on with the crypto sector right now, and whether Bitcoin and other crypto assets are worth investing in right now (or if investors are better off waiting for a more opportune entry point).

What’s Driving This Selloff?

Those bullish on the crypto sector as an alternative asset class worth investing in have reasons to stay invested. For one, Bitcoin and other leading cryptocurrencies allow investors to keep some capital outside the traditional monetary system. For those concerned about inflation, the value of the U.S. dollar — which has fallen around 10% since the start of the year — and other key potential economic issues, that’s the kind of insurance that’s worth buying (even if it seems expensive).

Just looking at the trade in gold and other dollar alternatives, it’s clear the near- and medium-term trend has been moving in the right direction for crypto investors. But it’s also true that crypto’s status as both a hedge against monetary and fiscal policy concerns also coincides with this asset being deemed a speculative one.

In other words, when the market is flying higher, expect even bigger returns from the likes of Bitcoin, other alt coins and the myriad of platforms and blockchain-based applications that rely on this technology.

But when we’re in a down market, or one that’s trending in the wrong direction (this recent selloff appears to be tied to concerns around the stability of the financial system, with issues around fraud and sub-prime lending once again boiling to the surface), it can lead to even larger gains than the equity market could produce.

Earlier this week, Bitcoin saw record liquidations take hold, which drove billions of dollars worth of positions to be eliminated. That’s because so much of the crypto sector continues to rely on leverage, and in particular many highly-levered derivatives products such as perpetual futures.

Is Crypto an Asset to Be Held or Traded?

Here’s the thesis I want to put forward. For those who believe Bitcoin is the future and will continue to rise relative to the value of the U.S. dollar, this is an asset class to be invested in. That means buying when one sees an opportunity and holding for some specified time period. Going in an out of positions, or using leverage to trade Bitcoin or any other digital asset, is a recipe for disaster for long-term BTC investors.

That’s just a mathematical argument to be made, given how volatile Bitcoin has historically been relative to nearly every other asset class out there. Until we see some sort of similarity arise where Bitcoin’s volatility metrics correlate more broadly with other assets like equities, trading or investing using leverage really is a recipe for trouble. That’s because even if an investor is able to double their money consistently using leveraged positions, it only takes one liquidation event to remove this particular investor from the game.

Thus, even the seemingly “safest” leveraged bets should never make up more than a small percentage of an individual investors’ portfolio. Unfortunately, that’s not how the game is played by many in this space by many “hodlers.” And with each stark selloff, there’s an increasing likelihood that more conservative investors concerned with capital preservation steer clear of crypto altogether.

On the other hand, it’s also true that when these selloffs take place, investors who have been waiting for entry points to add exposure then get their chance. The so-called “weak hands” get pushed out, making room for new capital to be deployed at a better base price, leading to potentially higher gains for those who are willing to wait through what can be an extended period of pain (just talk to any investor who rode out the 2022 bear market).

What to Do From Here?

In my view, the crypto market is an interesting space for investors to consider. There is some intriguing underlying technology here that’s worth exploring. And there’s a solid reason to believe that individuals, companies, institutions and even governments will want to keep some capital outside of the banking system for various reasons. Whether you think Bitcoin is digital gold or not, there’s going to be money flowing in this sector, and profits to be had.

The thing is, I think the vast majority of these profits will go to the level-headed investors who buy during periods of intense pain for this sector and hold for a period of years. That’s just the recipe that’s historically proven to work. Trading this asset class, whether it be in Bitcoin or even more speculative alt coins, is likely to turn out poorly over most time frames.

So, for those looking for a better entry point, Bitcoin near $100,000 should look a lot better than $120,000 Bitcoin. It’s just up to each individual to assess how much capital to deploy today, relative to the opportunities that may come down the road.