Retail investors who want to dip their toes into cryptocurrencies to diversify their portfolios are facing an extremely volatile market — virtual currencies have lost $350 billion in value year-to-date due to orders from regulators and hacking.
The cryptocurrency market, which consists of bitcoin and several other major digital currencies, crumbled June 22 as the majority of the coins dipped by up to 10 percent due to six exchanges in Japan that were ordered by the Financial Services Agency, its financial watchdog, to improve their current practices, and as two exchanges were hacked within an 11-day period.
Losing billions of dollars in market cap for cryptocurrencies is not unusual. In December, bitcoin reached a high of $20,000, but dipped to $8,500 by mid-March.
[Read: What’s the Best Bitcoin Wallet?]
The virtual currencies are encountering more losses due to hackers and within the past two weeks $70 million of cryptocurrency was seized. Bitcoin is now trading less than $6,000.
Investors who want to invest in bitcoin, the primary cryptocurrency, and other virtual coins such as ethereum, ripple, litecoin and monero should follow these tips from traders.
Expect lots of volatility. While a movement of 5 percent is a pretty big in equities, a movement of 20 percent within a single day in cryptocurrencies is “actually quite normal,” says Mati Greenspan, a senior market analyst at eToro, a Tel Aviv-based social investment network.
“Blockchain technology is still considered to be in the experimental stage and there is always a possibility that any digital asset can go to zero,” he says.
Since all of the virtual currencies remain a speculative asset, investors should avoid buying them for their retirement portfolios, says Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor. Cryptocurrencies made up less than 2 percent of his portfolio a few months ago, but he is no longer trading them because of the extreme volatility.
Common sense doesn’t apply for some traders. In October, Spatafora started trading bitcoin, litecoin and ethereum to learn about the market and understand whether any of the coins were undervalued. Instead, he found that many of the investors exhibited irrational exuberance in believing the virtual currencies would never stop their climb in the market.
“People always think they are going to go in and buy when it’s the dip,” he says. “Say bitcoin is trading at $10,000, then a lot of selling occurs and causes panic and some investors reenter at $7,000. Then bitcoin bounces at $8,000, but goes back down to $6,000 and people buy back in thinking it’s going back up and they are making money hand over fist.”
[Read: What You Need to Know About Bitcoin and Cryptocurrency.]
Short- and long-term traders can profit. Cryptocurrencies are a different asset class because both the volatility and risk are much higher. Since it is still in a very nascent stage, the likelihood that some of the “best projects have yet to emerge” are high, Greenspan says.
Both short-term traders and long term investors can find advantages in trading bitcoin. Day traders will find the cryptocurrency market provides a high level of volatility rarely found elsewhere.
Since cryptocurrencies are not correlated with other markets, a small percentage of crypto can “actually add stability to a well-diversified long term portfolio, he says.
Regulation and advertising bans weigh down prices. While bitcoin and other digital currencies are immune from geopolitical and economic issues that affect stocks, they face many challenges as the industry continues to face outside regulation.
Bitcoin faced extreme headwinds in March when Alphabet’s Google (ticker: GOOG, GOOGL) joined Facebook ( FB) in banning ads for cryptocurrencies, which lowered liquidity in the market. In an abrupt reversal, Facebook said on June 26 that it would allow some ads for cryptocurrencies, but continues its ban against initial coin offerings and binary options.
“Bitcoin keeps dropping lower and lower and what really killed it was when those two tech companies stopped allowing ads,” Spatafora says. “All that demand started drying up.”
Know when to sell. Learning when to sell a cryptocurrency is critical because the losses are often much larger than stock declines.
Many litecoin investors followed the wrong herd last December when its founder Charlie Lee sold all of his shares in the company to avoid a conflict of interest. This should have indicated to investors that the price would not hold and would decline, Spatafora says. Instead of selling, many crypto investors bought more litecoin “like idiots when it was not sustainable,” he says.
Spatafora, who primarily trades cannabis stocks, said the trading patterns in bitcoin and marijuana stocks are often parallel to each other, especially the mentality of the traders. He was part of the bubble of cannabis stocks which burst in 2014.
“It is identical to bitcoin with everyone piling in and chasing the top,” he says.
[See: 9 Ways to Invest in Red-Hot Tech Stocks.]
Beware of price manipulation. Bitcoin runs into other issues that other asset classes do not undergo. The digital currency often experiences more volatility on the day a bitcoin conference starts, Spatafora says. Last December, the price of bitcoin hit $18,000, but tanked the day the conference started.
“When bitcoin traders get together, they are manipulating the price,” he says. “While I have seen shady people trading over-the-counter stocks, nothing compares to bitcoin manipulation. Bitcoin traders make the OTC guys look like altar boys.”
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6 Things You Don’t Know About Trading Bitcoin originally appeared on usnews.com
