Why is there a Crypto Surge and What Does it Mean for my Portfolio
Introduction
The last couple of months have seen a huge surge in cryptocurrency prices, with all major coins returning to, or surpassing their all-time-highs. This has naturally brought the topic back into the public eye, with many major political and financial figures weighing in with their opinion on the quality of the asset class.
It has always been polarising, even amongst the smartest and most accomplished in society, but with Bitcoin this month approaching $100,000 for the first time ever, the discussion has reached frenzy level.
Now, it can be very easy to get carried away when things like this happen - particularly if you have exposure to crypto in your portfolio. So what does it mean and what should you do with regards to investment strategy?
The Reason for the Boom
There are a couple of reasons there has been such a big pump in the last few months. The first of these is the election - with Donald Trump winning the US election last month the world realised that we can come to expect another presidential term of aggressive expansionary fiscal policy and business friendly regulation.
The Election
This is exacerbated by the fact that the Senate and House of Representatives are also now Republican, which means that he has as close as possible to carte blanche to push through what he needs. That's the thing about the markets - if people expect them to go up, they will go up as anticipation causes more buying, which pushes prices up.
Market Sentiment
General market sentiment is better than ever before - stocks, or the S&P 500 which is a good proxy for the wider stock market, has also been at all time highs and there is lots of capital to deploy. Despite fundamentals remaining straightforward, when there is lots of money being pumped into the market it continues to go up.
There has also been continued adoption within financial markets of crypto: it's clear now that it's not going anywhere. So this means that with institutional adoption gradually taking place, crypto is starting to be seen as a safer (not safe) place to park capital.
Inflation
We have also seen a period of high inflation recently, which has pushed investors into assets that aren't devalued or affected by the inflationary environment. And what better than a scarce asset, the volume of which cannot be increased.
Although the transaction part of Bitcoin (or others) is still yet to be proven in the wider market (when was the last time you bought something with Bitcoin?), its use case as a store of value is now somewhat cemented.
Market Cycles
As with many assets, cryptocurrency is cyclical. To put it bluntly, it goes through bear and bull markets like many things, representing a culmination of factors. Right now, it's in a bull market. Simple as that. In that way, it's similar to stocks.
What Should I Do?
History dictates that it's probably a bad time to make a big investment into crypto when prices are at all time highs - at least if you have any plans to see that money again in the medium term.
That being said, if your strategy involves pound cost averaging, as many people's does (well done if that's you) - if makes a lot of sense. If you've been buying crypto as part of your long term monthly investing strategy, by all means continue.
Just as with stocks, the best way to make money is to invest the same (or an increasing amount) each month and ignore everything that happens in the market.
What about selling?
We would also generally recommend against this, except in a few cases:
- You need the cash. Now is a great time to liquidate some crypto if you need to get access to cash - it will likely not be worth as much at other points in the future. It's worth more than it ever has been before! So you're almost certainly sitting on some gains.
- You want to rebalance. The thing about crypto growth, is that it increases your exposure to cryptocurrency. As the asset grows, it represents a much larger percentage of your portfolio and thus makes your portfolio more risky.
A smart investor will notice this over time and re-allocate some funds into other asset classes in order to make sure that their portfolio allocation remains in line with their capacity and tolerance for risk.
Conclusion
It really is that simple! We're in a bull market, enjoy the gains you will no doubt have accrued and if you need to trim some profits either to take the cash or to rebalance your portfolio, now is a great time to do so.
Don't forget that you'll also probably be liable for capital gains tax on the gains that you will have made. As always, you can use the Strabo Dashboard as a crypto portfolio tracker to manage your assets and keep track of your gains (and losses). Happy investing!
