Though the past few weeks have been dreadful for crypto investors I feel the majority of the downturn has occurred and the subsequent recovery we are seeing in some good quality coins is a sign that the market is ready for another swing upwards. Corrections are necessary in all markets due to the over enthusiasm that people tend to exert in appreciating markets. These downturns flush out weak hands; investors that are over leveraged and taking on too much risk, investors who know little of what they are investing in and so are uncommitted investors, and those investors who take on too much risk by over weighting speculative investments or who do not diversify enough. Once these weak hands have finished selling their coins the market can regroup and begin another march higher with the support of long term investors looking to hold their coins for the long term in order to realize all the benefits these blockchain projects will provide. With stronger investors behind them good projects can ascend to even higher levels.
The volatility of crypto markets is extreme to say the least. Major stock exchanges do not see the level of volatility we see everyday in this new, immature market. For investors thinking of investing all or the majority of their capital in these markets they should be aware of this extreme volatility. When the market is appreciating it is easy to participate in crypto markets as making money is not too stressful. The real test of being a long term investor in these markets are these significant downturns which happen a handful of times every year and are likely to continue doing so for the next 3 to 5 years as this market matures. I think crypto investors should be prepared to face downward volatility in the neighbourhood of 75-80% and in a sharp downturn their crypto portfolios would be down by this amount (75-80%). In this situation which we are likely to see over time one should consider what they are likely to do and see if they are able to hold onto their coins in such an event. If this level of volatility is just too risky for their overall financial well being investors should consider reducing their capital allocation to crypto assets.
The recent downturn we have experienced over the last few weeks I would rate as a moderate one for crypto markets as it appeared to be the result of the expectation of negative policy changes by the South Korean government and possible increased regulation from other countries around the world. Crypto markets will react with greater severity to actual changes in regulations by important governments, or changes in the economy, or in diminishing expectations as to the benefits of blockchain technology. I think in severe downturns the 75-80% haircuts would be possible and so investors should prepare themselves for these scenarios and have a strategy in place to survive such an event and even to capitalize on the fear that such an event would create in the investing community. As they say "it's good to buy when there is blood in the streets".
