Photo by Ayo Ogunseinde on Unsplash
I know what you’re thinking.
“Why doesn’t this guy Dollar Cost Average? It gets rid of the guesswork.”
You’re right, it does, and I agree with you.
Dollar-cost averaging takes the emotion out of investing by consistently buying a set amount at regular intervals, regardless of market fluctuations.
I recently received a message from a friend asking where to dip his toe in the crypto water. He mentioned he had $200 he was willing to invest speculatively based on my say-so and was happy if nothing came of it and it went to zero.
I usually stay clear of any arrangement involving friends and money and hit home that this needed money he could afford to go to lose.
My advice to him was — Do your homework on Bitcoin and Ethereum.
Put 50% in Bitcoin and 50% in Ethereum.
It’s a backwards approach, but once you have skin in the game, regardless of the amount of money, it completely changes your mindset and leads you to learn about the underlying technology.
You become more than…
“Crypto go up, good, Crypto go down, bad.”
I’d always respect $200, but with such a small investment, Dollar Cost Averaging would be a waste of time.
Invest, go to sleep and don’t look at price trends.
People new to crypto don’t think like that. I was new once, and I used to watch price charts daily and feel my heart sink when my bags dropped by 30%.
A 30% drop in a day is Par for the course. If you’ve been around for a while, you’d have experienced way worse. Now it’s an exciting event because it presents another buying opportunity.
When newbies I speak to freak out that the market is dropping, it reminds me of my journey.
I associated risk with some bizarre things.
You’ll spend $200 on a night out you can’t remember and $400 on some clothes you’ve never taken the tags off, but you’ll lose your mind watching a volatile investment you haven’t lost money on (until you sell) up and down in value.
The underlying technology will undoubtedly feature in your future.
In the next 50 years, no world exists that the word Blockchain doesn’t come out of our mouths.
It’s got me thinking.
A large group of people with a small pot of cash want to get involved in Crypto, and if their first experience is a positive one, they’ll stick around.
To those people, I tell you, be patient, and don’t go all in on Crypto now. If you buckle up and strap yourself in, I’ll explain why and when it might be safer to pull the trigger and maximise your returns.
For the record, I’m incapable of predicting the future, and you should also make your decisions based on YOUR research.
Don’t Be Fooled By The Recent Price Recovery
If you’ve been watching the Cryptocurrency prices like a hawk, you’ll have seen the recent recovery, which looks bullish. Still, the crypto community can be illogical when investing their money.
Crypto prices are increasing because of three main factors.
- We’ve had a positive CPI report (Consumer Price Index)
- Inflation has come down from 7.1% to 6.5%
- Insolvency practitioners recovered $5 Billion in liquidity from the FTX debacle.
The positive Inflation report from the Fed of it coming down from 7.1% to 6.5% is the main point here because it means that the cost of everything in our daily lives is coming down. It also means that the government are less likely to continue to increase interest rates which means there’s more liquidity in the market.
More liquidity means more people investing. Simple. Less, and people sell off their holdings anticipating a downturn.
Last year, following the Federal Reserve’s meeting on interest rates, the value of Bitcoin began to decline significantly.
The yellow circle in the below chart is where the market anticipated interest rates would increase, which would harm Crypto, so people were pricing this early.
Then the Fed approved a 0.5% point interest rate increase in May (Circled in red) and laid out a plan to reduce its $9 trillion balance sheet, which got even worse for Bitcoin and the broader Crypto market.
You can see how increasing interest rates directly impact the Cryptocurrency market — from Bitcoins high of $47k in this period, it dropped to a low of $16k, almost a 70% correction.
It shows you that we’re not out of the woods yet, and people are missing one crucial factor. Inflation may be coming down, but the FED chairman Jerome Powell wants to go down in history as the man who defeated record inflation and the world’s saviour is not budging.
The federal reserve forecasts further hikes well into 2023 and predicts a long and likely painful campaign to bring down inflation.
Jerome Powell — Source
“We anticipate that ongoing increases will be appropriate to attain a stance on a sufficiently restrictive monetary policy to return inflation to 2% over time.”
In simple language, Powell expects they’ll need to keep raising the interest rates to get inflation to 2%.
Who knows what that could do to Crypto?
It’s worth noting the current 6.5% inflation is still miles away from 2%, a rate generally accepted by most central banks. But it shows that the Federal Reserve’s aggressive hiking of interest rates has the desired effect.
So they may keep hammering the nail in the inflation coffin, burying Crypto with it.
Or they may take a new slower pace to tighten rates with inflation and the cost of goods coming down, but it’s still at astronomical levels.
The crypto market is pricing in the news with a slightly positive outlook.
I’m not sure this will end well in the short term; believe it or not, the most anticipated event in cryptocurrency land.
The most anticipated event in cryptocurrency land, believe it or not, is the next Fed policy meeting, where they’ll discuss their stance and vote on whether to increase rates (March 2023).
It’s a decision made by all of the Fed’s leaders, and people in the crypto world are waiting with bated breath.
Interest rates are currently between 4.25% and 4.50%, but in the Fed’s previous report, it planned to increase the rates again this year to a level between 5.00% and 5.25%.
Here’s how the Fed board members voted on their projections which will be further discussed this March. They’re expecting rates to increase to 5.1% before pivoting, and only in 2024 do they see interest rates coming back down to 4.1%
Final Thoughts.
Cryptocurrency investors behave irrationally, considering inflation is at record highs and there is so much uncertainty, which is entirely rational for Crypto.
We’re still far from max pain with the economy.
Even the Fed predicts things to worsen and is expected to increase interest rates. They’re the people who make the decisions, and it’s in black and white what they intend to do.
Jerome Powell has said it himself.
“Persistent High Inflation is a much more severe threat to economic well-being in the long run than some supposedly short-term pain.”
It’s hard to see the Fed dropping interest rates when they are already below their target of 5.1%.
There is a lot more wiggle room for interest rate increases. Inflation is still colossal, and the FED is setting its interest rate stall out for 2023.
If you’re like my friend who’s happy to chuck some money into the wind of the crypto markets, and it’s not worth dollar-cost-averaging, I’d be waiting on the sidelines for a while.
Unless you want to experience some volatility, then, by all means, jump on board.
This article is for informational purposes only; it should not be considered financial, tax or legal advice. You can consult a financial professional before making any significant financial decisions.
This article is for informational purposes only; it should not be considered financial, tax or legal advice. You can consult a financial professional before making any significant financial decisions.