2021-05-20 07:22:00

As Bitcoin, Ether, Dogecoin show their true colours, experts tell you what to do now

NEW DELHI: Holding Bitcoins? Chances are you are getting jittery to watch the most popular cryptocurrency gyrate between extreme ends?

Or, if you have been holding them for at least two years, you are cool about it as you would still be sitting on 4,000-5,000 per cent gains! For, only in 2018, the crypto token was trading at $3,300.

Last 24 hours have been very volatile for cryptocurrencies the world over. An steep 30 per cent drop followed by an equally sharp recovery in the Bitcoin, have made investors jittery. They are confused whether to cut exposure or buy on dips.

Nithin Kamath, Founder & CEO at Zerodha said he has no exposure to cryptocurrencies. “But the rules for investing are the same: Reduce percentage exposure if the risk is high, and do not average down,” he said.

In a series of tweets overnight, Kamath said while it is tempting to average down, the odds of this strategy working out are significantly low in the long run.

“All it takes is one large move on the other side for things to go wrong. The right way, for most people, is to not have concentrated positions,” he said.

At the same time, Kamath also raised the red flag over the risks from leveraged trading that the crypto exchanges are offering.

Bitcoin, the largest cryptocurrency by market value, had plunged 30 per cent to hit the $30,000 level on Wednesday after China signalled a new crackdown on the cryptocurrency and Tesla CEO Elon Musk made a U-turn on his car company’s use of the unit. The most popular crypto them witnessed a spectacular rally to breach past the $40,000 mark on Thursday, data at Bitstamp, the Luxembourg-based crypto exchange, showed.

Boom and bust: How Bitcoin prices have swung wildly since 2010

What’s behind the big Bitcoin crash?

Bitcoin, the world’s most popular cryptocurrency, is used to volatile price movements ever since it started trading for less than a penny in 2010. On Wednesday, Bitcoin saw its deepest selloff since the crypto mania kicked off last year amid pandemic as prices plunged more than 30 per cent in less than 24 hours. Bitcoin was already under pressure from tweets by Elon Musk when China banned financial institutions from providing services related to cryptocurrency transactions.

Musk tweeted ‘diamond hands’, which was interpreted by the market as the company’s commitment to hold on to its Bitcoin assets, and some said that’s what helped the cryptocurrency recover.

At 11 am IST on Thursday, Bitcoin traded at $39,620, after hitting a high of $40,000.

Musk’s Tesla made an investment of $1.5 billion in the cryptocurrency earlier this year.

The crypto crash impacted trading on crypto exchanges globally, triggering outages as some investors rushed for exit. India, too, got impacted, with WazirX, the largest domestic crypto exchange, seeing multiple disruptions.

Nischal Shetty, Founder & CEO at WazirX, said the wild movement in Bitcoin was nothing unusual. “If you study the history of the whole Bitcoin price movement, you will see these dips happening often,” he said.

“What we are seeing has not happened for a long time, where you have seen a dip of this magnitude in cryptos. In the last 12 months, there has been an upward trend for the whole crypto sector in general. It is sort of unsettling for a lot of investors. But the reason why most of the exchanges are under heavy load is the fact that there are a lot of new people coming in. The next few days will give us a clearer picture, but it seems there has been a lot of buying pressure as well as a lot of panic selling — or I would say profit booking – from those who entered Bitcoin about a year ago. If you look at it, it is technically at least three to four times higher than the price one saw in 2020. It is a combination of profit booking and panic selling,” Shetty told ETNOW.

Avinash Shekhar, Co-CEO of ZebPay, said the fall in Bitcoin from its all-time high level may look dramatic, but it is normal in many volatile asset, including cryptos, especially after such a huge rally.

“Such corrections are mainly due to short-term traders taking profits. Long-term value investors might call these lower prices a buying opportunity, as MicroStrategy just did. Technical analysts would call this a test of the support level around $40,000. Neither type of investors would say that tweets are the underlying cause. Use strategies like rupee cost averaging and SIPs to more confidently manoeuvre through volatility and take a long-term view,” he said.

Nikhil Kamath warned leveraged bets could cause big damage in such situations.

“When a platform offers leverage or funds the customers to buy for more than the money in the account, the platform takes a credit risk. With crypto exchanges offering 10 to 100 times leverage (futures), I wonder who monitors liquidity positions of these platforms on days like Wednesday,” he said.

Drawing a comparison with the regulated space, he said even with all the checks & balances, brokerage firms once in a while go bust on days of extreme volatility.

Shetty said corrections like Wednesday’s can bring in some sort of sanity to the crypto market. “This dip will make the market more mature and it will ensure that people are aware there will be downtrends and uptrends in the sector and one needs to come to this with the long-term view rather than making a quick buck. Overall, it is going to just make the industry stronger than probably the perception it had built over the past 12 months,” Shetty said.

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