FTX’s stunning collapse has further eroded confidence in the crypto industry, where markets already were grappling with a prolonged period of depressed asset prices. While it appears that for now, the aftershocks are contained vs. cratering the broader economy, the meltdown happened in the midst of turmoil. And while this news happened amid another so-called crypto winter, it also emerged after signs that crypto was becoming more mainstream with Fidelity Investments officially opening its new crypto service for individual investors. The questions on investors' minds now: What place should cryptocurrency hold in a portfolio, and what is the bigger picture going forward?
The price of bitcoin is currently hovering around $16,500 – drawing inevitable comparisons to its all-time high of $66,000 just a year ago. We are in the midst of a sell-off that is generating doomsday headlines along the lines of “The Week Crypto Died” or the even more dramatic “How Crypto Goes to Zero.'' Investors, in addition to selling on open exchanges, are reported to be turning to off-exchange trading. And then there are those who are holding and waiting for the tide to turn.
How should retail investors approach the conundrum of what to do in crypto? On the one hand, ordinary buyers should beware there is risk in trading crypto — even potential zeros. To stay clear, follow basic best practice . Look for real use cases. For example, Ethereum allows you to trade NFTs, offers smart contracts and blockchain-based games. This all translates to real revenue streams with value. Also, just as with a stock portfolio, diversify and have a long-term mindset. In the same way that a range of assets will balance the risk and reward in your equities portfolio a crypto basket with a variety of bets will reduce volatility. Last but not least, and very relevant now, stay clear of trying to time the market. If you believe in crypto and its proposition, stay in and hold tight. The cycles of volatility are likely to continue.
While the current storm rages on, it is important to remember that we could be in a situation similar to the burst of the dot-com bubble. If FTX ends up having a ripple effect across the industry dragging others down with it, it could prove to be what was needed for new business models to surface. The downfall of FTX could lead to the birth of a future Google, that will go on to deliver on the promise of blockchain and crypto, changing the way we live.
Moreover, the current selloff could end up being a positive for the market, sifting away less savvy and knowledgeable investors so called “irrational traders.” If there are too many irrational participants in a market this can end up having a troublesome effect on prices. If they exit, a better balance of rational and rational actors is restored, and crypto asset pricing could normalize to better reflect true worth.
At this point, there is much that remains uncertain, but as we look ahead there is one likely outcome – further regulatory scrutiny. There is a lot at stake. Scandals like FTX ultimately end up jeopardizing the support of investors, innovators and entrepreneurs looking to use blockchain technology to develop services and solutions that make financial transactions safer, faster and cheaper. Regulation is needed but it should focus on addressing theft, fraud and keeping the mainstream financial system protected. Suggestions like requiring exchanges to back customer deposits with liquid assets and stricter disclosure rules would stabilize the industry and allow it to shed some of its current dodginess.
For crypto to rise again, it will have to battle its way through current controversies and likely also more businesses biting the dust. But the crypto market has shown the past that it moves in unpredictable ways and shouldn’t be counted out. For informed investors who want to build a diversified portfolio for the long run it could be a good, or at the very least, interesting bet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
David McDonough
David is the founder and CEO of Commonstock, a social platform dedicated to improving the world's investing knowledge, backed by hedge fund managers Bill Ackman, Dan Loeb, Stanley Druckenmiller, Coatue and QED.
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