The risk-off sentiment from investors in recent months has hammered the stock market. But the market for cryptocurrencies has been crushed harder. After peaking at nearly $3 trillion in November 2021, the total market value of digital assets is $900 billion as of this writing.
Nowhere else is this pessimism more evident than with Bitcoin (BTC -0.02%). The world's most valuable cryptocurrency, viewed by many as the bellwether of the entire industry, has cratered 67% over the past seven months.
Is now a good time to buy Bitcoin on the dip? Here's what the smartest investors know.
Crypto is extremely volatile
Probably the most obvious thing to know about crypto is that the asset class is incredibly volatile. Even investors in some of the most volatile high-growth tech stocks are in for a rude awakening when it comes to the gut-wrenching daily price moves in crypto.
While many proponents of blockchain technology and cryptocurrencies hope for the development of real-world use cases, so far, the industry has been characterized primarily by speculation. And this makes sense, given that the meteoric price rise of some tokens naturally attracts others looking for a quick profit. Despite its recent fall, Bitcoin has produced an 800% return over the past five years. That crushes the S&P 500's 65% total return during the same time.
The proliferation of financial tools and service providers for the crypto market has somewhat exacerbated the problem of volatility. Companies like Block, Coinbase Global, and Robinhood Markets all make it seamless to buy and sell crypto. This user-friendly approach reduces the friction to transact, which could help support wild price swings.
Owning any cryptocurrency, even Bitcoin, requires one to be able to stomach the inevitable ups and downs.
Crypto is full of uncertainty
Where will Bitcoin and crypto be in 10 years? What about five years? These questions are nearly impossible to answer because there are just too many unknowns surrounding the nascent asset class. For starters, perhaps the biggest bear case is the possibility of onerous government regulation. Countries that feel their power is under threat may simply ban owning and mining crypto, as China did last year.
Besides regulation, cryptocurrencies simply have an extremely wide range of outcomes. Bitcoin is slowly being viewed as a legitimate store of value and a substitute for owning gold. But some, like Block's founder and CEO Jack Dorsey, see it as the native currency of the internet and a way to transact with others in a more digital future. And when it comes to the world of decentralized applications, the potential to upend a range of different industries by giving power to the users of services is vast.
Crypto could change everything, completely die off, or end up somewhere in the middle. I don't think anyone knows with any level of certainty. Launched in 2009, Bitcoin has the longest operating history of any cryptocurrency out there. Even so, its future is anything but certain.
Investing in crypto requires proper risk management
With a ton of volatility and a wide range of future outcomes related to its development and adoption, investing in cryptocurrency requires proper risk management. If someone has a very long time horizon when it comes to their portfolio, it could be prudent to invest 100% in stocks. But because of some of the arguments I made above, this wouldn't be the right approach to cryptocurrencies.
Therefore, for those investors who understand and accept the various risks and the uncertainty of this asset class, I think it makes sense to allocate 1% to 2% of a well-diversified portfolio to crypto. The thinking behind this strategy is quite simple. It's an asymmetric bet, where the downside is limited to that small amount, and the upside potential is absolutely massive should digital assets achieve mainstream adoption.
Some of the best investment returns can be had by those willing to put money to work when it seems like everyone else is running for the exits. That time is today.
