Weekly report: Davide Chiantore on Cryptocurrencies
Davide Chiantore – Abalone Solitaire
Cryptocurrencies have been a much-debated topic in recent months and years. This type of asset has become very popular among investors, especially those of younger generation.
Digital currencies are relatively speculative assets which can be divided into two main categories: those with a more stable and historical record, such as Bitcoin, and the more recent ones that tend to be more aggressive currencies with higher volatility.
Price stability is also established by a cryptocurrency’s history, so the more recent it is, the higher its volatility.
A large part of the success of cryptocurrencies in recent years has been due to the low interest rates of Central Banks, meaning a low cost of money and therefore a higher risk appetite to invest in even more aggressive, risky and volatile asset classes.
The phase of low rates, after a decade, is coming to an end. The Federal Reserve has already started with the first hikes and the European Central Bank will soon follow.
The liquidity drain we are experiencing on more traditional markets such as bonds has already partly reached the cryptocurrency sector.
The impact will be felt most on the larger and more historic currencies in terms of market cap, whereas in terms of performance, the most violent impact is on the more recent currencies, hence with less history, where the percentage losses have been considerable and there will still be very high volatility.
Asset classes such as Bitcoin, which have a large market cap, tend to be less volatile and have less impact when rates rise, in fact the price of Bitcoin has stabilized slightly. In fact, a fairly linear correlation with the performance of stock and bond markets has been seen in the recent past. Newer cryptocurrencies tend to be aggressive and more volatile, it is unknown whether they will be successful or not, so it is reasonable to expect major price losses as well as very large upside potential.
In recent weeks we have witnessed the deterioration of the scenario in the crypto world. This has greatly impacted some smaller currencies which have suffered huge losses.
Young investors, who are the most likely to invest in this sector, can be advised to be very careful; very often, some assets lose value in a short time and then struggle to recover it.
Less experienced investors can suffer real psychological shocks because in a very short space of time they can see an important part of their investment pulverized, so great caution is advised even when the gains may be high, especially in order to be able to cash them in and later manage them better.
In recent months, the crypto sector has experienced a lot of volatility due to the events surrounding the war and also due to the resumption of inflation.
This asset class tends to remain fairly stable over the long term, whereas in the short term the immediate impact tends to be negative. Besides the liquidity drain and rising rates, this is another reason why we have seen general weakness in the sector, with market cap losses also significant.
It should not be forgotten that cryptocurrencies are such a growing sector that they have in fact generated additional quantitive easing to that generated and implemented by Central Banks in recent years.
One of the most important dangers in the cryptocurrency sector is that some cryptocurrencies unfortunately do not have a real and particularly solid underlying value, so in the event of a loss, it is very difficult to recover.
Instead, investments in the stock world are different, where any losses can be recovered more or less quickly simply by waiting. For example, if one invests in a well-established company there may be a loss in the immediate term, but in the medium to long-term there is a good chance of recovery and even a gain.
We have seen in the last few years some cryptocurrencies that have solidified and created a track record, proving that they have real value, a value of storing and transferring wealth.
Other cryptocurrencies, on the other hand, are dead and unlikely to recover their value. Therefore, it is advisable to proceed with caution when approaching this sector. Investors should go and see the underlying value and evaluate if there could be business potential linked to the usefulness of these cryptocurrencies in the real world, in the Fintech world, or more generally in the world of information exchange of data and wealth.