While the S&P 500 has gained 6% during the past three months, things haven't been the same in the cryptocurrency world. Prices of some of the most popular coins have plunged. The cause often is as clear as mud -- no surprise in a volatile asset class that doesn't have a long history.
Is it time to move on and sell your cryptocurrency holdings? Continue reading to find the answer to this pressing question.
What's driving the rout?
Many of the top cryptocurrencies, including Bitcoin (BTC -0.10%), Ethereum (ETH -0.16%), Solana, and Cardano, have fallen a lot in recent months. This coincides with the general decline in high-growth technology stocks, which is primarily the result of the Fed's plans to taper asset purchases and raise interest rates several times this year.
I view the pessimism surrounding the broader crypto market as simply a risk-off viewpoint for investors. There's a ton of uncertainty out there right now. In addition to the Fed's actions, the surging spread of the coronavirus omicron variant, soaring inflation, and a very tight labor market could be spooking investors into safer assets. In this scenario, the riskiest assets in investors' portfolios, most likely cryptocurrencies, have been the first to go.
The crypto market has shed roughly $300 billion in value since Wednesday, Jan. 5. So, are we experiencing the start of a crypto winter, with no recovery in sight for some time? I don't know the answer to that. If you invest for the long term, though, it shouldn't matter.
Should you run for the exit?
In the same vein as stock investing, I don't view a price drop as a signal to sell. Making your investing decisions based on what others are doing is a flawed approach that can lead to buying at the highs and selling at the lows. This won't produce solid returns over the long term. On the contrary, being able to hold on throughout the ups and downs is rewarded.
Cryptocurrencies are a nascent and extremely volatile asset class. Before buying crypto in the first place, you should understand and accept this fact. In the past five years, Bitcoin has had numerous corrections of 25% or more, and this is the most developed and most valuable cryptocurrency out there. Ethereum is no different, with three drawdowns of 50% or more during the same time. Even the most volatile stocks usually don't see their prices fluctuate this much.
Therefore, I think it's best not to panic and sell right now. Instead, try to maintain your focus on the long term. Cryptocurrencies have great potential to upend a wide range of industries. Along the way, there will undoubtedly be periods, like now, when they fall out of favor. The naysayers will point to the industry's performance lately as a clear indicator that cryptocurrencies are overhyped and just a fad. But no disruptive technology gains adoption and broad appeal in a straight line. The smart money knows to follow the talent, and the talent is increasingly migrating toward crypto.
Keep calm and hold on.