The fact that the cryptocurrency market is extremely volatile should surprise absolutely no one. But the precipitous fall that's happening is catching everyone's attention.
Bitcoin (BTC -2.77%) and Ethereum (ETH -1.78%), whose combined market capitalization represents nearly two-thirds of this burgeoning asset class, have both been crashing since their respective recent highs. In a similar fashion to the dynamics of the stock market, investors might be inclined to immediately sell and run for the exits.
Don't panic. Here are two very important reasons to keep investing despite the market dropping.
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1. The potential for disruption still exists
If we take a step back, we will realize that cryptocurrency's potential for disruption is still very much intact. Even with governments flexing their various regulatory muscles, particularly in China (with the recent announcement that banks and payment companies were banned from accepting Bitcoin), there's still a lot for cryptocurrency bulls to be excited about.
The initial public offering (IPO) of Coinbase Global, a leading cryptocurrency exchange, in April was a sort of coming-out party for these digital assets. It was validation that cryptocurrencies have arrived on the main stage. Although there are still obvious concerns regarding volatility and utility, the fact that people can easily buy and trade these assets is a positive development.
So many smart and talented developers all over the world are working on ways for cryptocurrencies to achieve wide-scale adoption. Bitcoin, at a basic level, is seen as an alternative to gold. But because we are still in the early innings, coupled with a frenzy of speculators trying to get rich quick, extremely high volatility will only deter people from wanting to transact using it. If we get past this, then bitcoin has a chance to become the first truly worldwide digital currency.
Ethereum, on the other hand, strives to become a global computing platform. The potential for a system of decentralized apps, utilizing smart contracts, could upend a range of industries that are characterized by tightly controlled centralized organizations.
Again, the long-term merits of cryptocurrencies are still there, regardless of the recent price drop. There will be twists and turns along the way, but supporters of this new asset class shouldn't waver now.
2. You can't time the market
The second reason to keep investing despite the market dropping is simple and straightforwards: you can't time the market. This lesson comes from the world of stock market investing, which we can use to help us become better investors in digital assets.
You may get lucky once in a while, but timing the market is difficult to do well consistently. This has been mentioned countless times, yet human nature tells us that we can still do it. Furthermore, trying to time a nascent and highly volatile asset class (like cryptocurrencies), where it's not easy to even estimate a fair value, seems like a fool's game.
A tried-and-true strategy is to continue investing capital periodically, even during times of extreme market turmoil. Over time, we see that time in the market beats timing the market. And a study by UBS (UBS -0.40%) proves this point.
The firm compared a simple buy-and-hold strategy (of owning the S&P 500) since 1960 to one that sold every time the index hit a record high, only buying back in after a 10% correction. You'd think the latter would eat the former's lunch, but this is not the case. The buy-and-hold plan grew at 10% per year, while the market-timing strategy achieved annual returns of only 2.5%.
This hammers home the point that in order to gain the full benefits of financial markets, it's probably best for investors to stay in the game no matter what the market does in the short term. Looking at the current state of affairs in the cryptocurrency market, keep this timely advice top of mind, and only invest an amount that allows you to sleep well at night.
