Crypto’s Price Drop is Not About Crypto

Here we are again: another crypto winter. Bitcoin’s price has dropped 70% since November – the 7th time since its inception that this has occurred.

There are lots of reasons why this is occurring that are unique to crypto: there’s too much leverage, and it’s getting purged (similar to what real estate experienced in 2008); speculators got carried away with many crypto projects, from NFTs to algorithmic stablecoins; investors forgot the mantra “never chase yield” and found themselves grabbing for 18% interest rates that have started to prove ephemeral; and more. Winter is indeed upon us, and it won’t be over for many months.

But the crypto winter of 2022 is not just about crypto. The global economy is suffering, with all asset classes floundering except energy and (so far) real estate. And we all know why: rising inflation and interest rates, a struggling labor market, supply chain shortages, a coming global food, the lingering pandemic, and the big wild card, Putin.

Indeed, stocks are in a bear market, with many performing even worse than bitcoin. Peloton is down 91% in the past year. So is Carvana. DocuSign is down 77%. Snapchat 81% in the past year. All have performed worse than bitcoin – and your clients are likely to own more of them, too.

Anyone who points at bitcoin’s volatility should first look at stocks during this mayhem. In a single month, GameStop fell 76%. Netflix fell 49%. Meta (formerly Facebook), down 38%. By comparison, bitcoin’s biggest one month decline in this debacle is 42%.

We see similar examples with daily declines. Netflix lost 35% in a single day, 26% for Facebook and 25% for Target (its biggest one-day drop since 1987). See the chart for more. Contrast that to bitcoin’s biggest one-day decline during this debacle: 14%.

Nobody’s calling for elimination of Facebook from 401(k) plans – even though, ironically, your clients have lost a lot more money in Facebook than they have in bitcoin. I recommend just 1% of portfolios into bitcoin, but Facebook is 1.2% of the S&P 500.

All this is simply a way of saying that we need to treat bitcoin the same way we treat stocks. Specifically, that means:

  1. Don’t panic during market declines. Volatility is merely an inherent aspect of investing.
  2. Maintain a long-term perspective and treat periodic market declines as a buying opportunity.
  3. Reduce risk via dollar cost averaging and portfolio rebalancing.
  4. Engage in tax loss harvesting. By the way, bitcoin and Ethereum are not subject to the Wash Sale rule. Therefore, you can advise your clients to sell them, capture losses for tax purposes, and immediately rebuy them to preserve their allocation. No need to wait 30 days.

Yes, crypto prices are down. But those who point solely to that fact are misleading their clients.