Afraid to try your hands at crypto-investing after the crash? The Decrypter shows you how to succeed
Updated: Jul 16, 2019
So, let’s not circle around the most obvious thing here, the crypto market has crashed tremendously. The total market cap was, at its peak, over 815 billion USD and has since bottomed at almost 185 billion USD, a crash of 77% in just a few months. That is almost more extraordinary than the, more than, 4,700% run-up the cryptomarket had from the start of 2017 to its peak.
These numbers show, at least, one thing: Cryptocurrencies are extremely volatile. Daily price changes of over 10% is common even among the biggest cryptocurrencies. A lot of people have become very rich in this market, but people have also been financially ruined trying to chase these riches.
An understandable question is, of course, “is it really wise to invest in a market like this?”. Well, considering the recent crash it might actually be a good idea to invest now. Historically if you invested in bitcoin (which has shown to be indicative of the market as a whole) 3 months after a crash your average ROI after three years would be 1012% (considering the most 3 most severe crashes: 2011, 2013 H1 and 2013 H2). Interestingly three years and three months after every one of these crashes happen to be just a few months after another crash, implying that this scenario would be one of the worst-case ones, and still it yields a 1012% return over three years. Meaning your investment would triple in value every year.
Considering that the price three months after the 2017/2018 crash is about the same as it is at the time of writing, investing now would be a wise idea, historically. You may argue that this time is different, and I agree, but I believe it is different in a good way.
Blockchain and cryptocurrencies are only now starting to see real world traction, big investment firms (i.e. Soros Fund Management) and tech companies (IBM, Microsoft, Google) are all investing in cryptocurrencies or blockchain technology. Projects like ripple, omisego and vechain, among others, are all closing deals and partnerships with big corporations and are actually seeing adoption of their technology in real-world use cases. While the price tumbles down, the real value of many crypto assets are, more and more, starting to appear.
I think we can all agree that blockchain, or at least distributed ledger technology, is valuable. It enables an internet of, not only information, but of true value. The question is, however, how valuable is it, and what portion of that value will be tradable cryptoassets? Well, a survey conducted by the cryptocurrency exchange, huobi, on their users showed that 71% believe that cryptocurrencies will see substantial increases in 2019. But, that is to be expected when asking people that are actively buying cryptocurrencies, why else would they buy them? So, maybe that survey is not the most useful in this case.
Let’s look at the facts instead, the all time high was $836 billion, and it now sits at $209 billion, a 75% decline. One way of estimating the lowest possible value, aka the famous “bottom”, is to look at historical crashes.
(Source: CCN. *Orange values are indicative*)
As you can see, there have been many bitcoin crashes, especially considering the short time frame. Once again, you can draw the conclusion that cryptos are volatile, but you can also calculate the average percentage decline during crypto crashes. It equates to 47.5%(excluding the indicative values). Using this indicator, bitcoin, and thus crypto in general is currently oversold. However, historic analysis is seldom adequate to indicate future performance, especially in such a new market as cryptos. We need to examine this further.
Let’s look at what the experts say: Dan Morehead, founder of Panter Capital, who predicted the 2018 cryptocurrency crash, states a $4 trillion dollar market cap as very likely and that a $40 trillion dollar market cap would be possible. The CEO of the cryptocurrency exchange kraken, Jesse Powell, predicts a 1$ trillion market cap at the end of 2018, and the venture capitalist, Tim Draper, predicts that the total market cap will reach 80$ trillion within 15 years. So, the experts seem to be predicting a bright future for cryptos, but the fact that they are experts and thus deep in the industry may make their claims biased. The truth remains to be seen.
We could also compare the crypto market cap to different industries to estimate a value. Blockchain is disruptive to the payment and financial industries, servers, identification, security, to name a few. Using low estimates, these industries alone would amount to around 715$ trillion, if blockchain would be implemented into just five percent of these industries it would (theoretically) have a value of 36$ trillion, or 171x more than it is currently valued. Then you must ask how much of this value will be in tradeable crypto assets, but even if it would be just 1% of that, the crypto market would still be 71% undervalued.
71% might not sound like much but considering there are some cryptos that are currently yielding 5-8% annual returns from staking and other forms of passive income, an investment in cryptos will beat most other assets, assuming the above is true.
All above considered, it seems like the crypto market is undervalued. Consistent with this conclusion, is the recent increase in the crypto markets. No, there has not been many days of 20%+ increases, but there has recently been a slow and steady rise in the total market cap. It may continue like this, or it may start falling again. Whatever the case may be, i percieve many cryptos to be undervalued at this moment and will continue to buy and dedicate a smaller part of my total investment portfolio to these intriguing assets.
What are we buying? Well, I will discuss that, and how we decide what to buy in a future article. Stay tuned!
If you would like to know more about how to create the optimal portfolio to get exposure to crypto and blockchain you can read my other article here: thedecrypter.com
Thanks for reading.
/Alex - The Decrypter.
Note: Invest at your own risk and always make sure to research your investments thoroughly.