January 8, 2018
CRYPTO CRASH! WHAT DO I DO NOW?
MY GRANDFATHER WARNED ME ABOUT THIS!
It’s a bloodbath out there! I know I shouldn’t panic but boy when your portfolio drops 25% overnight it really hurts.
Large drops like this raise many questions, one being, what action should you take when this type of drop occurs?
WHAT DO I NEED TO KNOW?
What should one do, if when waking up, they learn 25% of their entire portfolio is gone as the entire market is spiraling downward? Now we could spend hours debating about what to do, running through countless numbers, scenarios, and outcomes, but that’s honestly just a waste of time. Why? Because in times like this there’s only one thing you really need to know. Is this a true crash or is this just another healthy correction? Depending on your answer you’ll know exactly what to do.
That brings this question to mind, what’s the difference between a true crash and correction and is there a way to know which one is occurring? For those of you who’ve never experienced a true market crash, be very glad! A true market crash lasts for a very long time and destroys everyone and everything in its path. When I say very long, I’m not talking crypto long, I’m talking Rip Van Winkle long. When a true crash is over there’s never a doubt because 99% of everyone involved will be completely busted. A true market crash takes no prisoners and will devour even the savviest of investors.
Now that I have your attention, you may be wondering, how can I know if I am caught in the middle of one of these types of crashes? Unfortunately, there is no simple answer to that question, but the good news is, there are certain indicators that can alert us as to underlying market conditions.
WHAT TO LOOK FOR
Overbought and Overvalued
There are several factors typically found before a true market crash. One of them is when markets are overbought or overvalued while actual economic conditions can’t support it. These are the conditions that existed during the stock market crash of 1929. After the initial drop, the markets appeared to be bouncing back, giving investors the illusion of a correction. The very next day it continued its downward spiral which proceeded to last for the next 3 years. By the time it was over 90% of America's wealth had been wiped away. This lead to what we now call the Great Depression.
Slowing Growth with Rising Inflation
Another indication of a true crash is when economic growth is slowing as inflation is rising. This was the case during the next crash which started on Monday, October 19th, 1987. This historic date would later become known as Black Monday. Along with the economic situation was a new technology called program trading which further helped accelerate the crash. Traders got caught off guard because they had a false sense of security, thinking the economic situation was better than it actually was. That year 78% of all traders were forced to claim bankruptcy losing everything, sadly, some even taking their own lives.
Immense Leveraging and Debt
The last indicator we’ll discuss is what we saw occur in 2008. Now even though some would argue this wasn’t a true crash, it was certainly a time in history that few will ever forget. Fortunes were lost and entire industries would be crippled for years to come. This, of course, was the sub-prime debacle of 2008. Credit default swaps, mortgage-backed-securities and money market funds lost hundreds of billions of dollars almost overnight. For the next four years, the entire economic scene would remain in turmoil. The main difference with this crash is that it had more to do with debt and nothing to do with a bad economy. Both investors and consumer were leveraged beyond what they could ever afford to pay back. This was the greatest Ponzi scheme the world has ever witnessed with even the ones at the top eventually losing everything.
SO THE QUESTION REMAINS, IS THIS A CRASH?
Could the next big drop finally be the bubble popping which so many experts predict will occur? To determine this, we simply need to see if any of the aforementioned indicators are present.
One big indicator was that of the markets being overbought or over-valued.
Do we see that in today's crypto markets?
Many might argue this to be the case since we’re up thousands of a percent on all coins. But one could make a counter-argument that these coins are still completely undervalued. How so? Primarily because no one knows what these coins, companies, and technologies are actually worth. Something can’t be too expensive if its actual value is completely unknown. Is Ripple worth the $95 Billion market cap it carries? Can Cardano possibly be worth $23 Billion when they don’t even have a working product? Let me ask you this, can an old beat up 1909 Honus Wagner rookie card be worth $3.2 Million? I would argue, it's absolutely worth it! Somethings value is based on one of these three things; Actual, perceived or future potential.
Though actual value is often most attractive to investors because they feel its more secure, the truth is actual value is just perceived value dressed up with a little eye-liner and lipstick. The house you live in today may have an “actual value” of say $300,000, but if no one is willing to pay that amount then the actual value is really a perceived value.
Therefore, if someone is willing to pay $3.50 for a Ripple coin then who can argue about its true worth?
Indicator number two, is economic growth slowing while inflation is rising?
So here is where crypto gets very interesting. Since it’s not controlled by any one country, person or entity, individual economic growth has little effect on its value. In fact, since crypto is seen as a safe haven for many, if economic growth is threatened crypto can become even stronger. Likewise as economic growth booms and there is more available money for investments, crypto will grow also. It’s really the best of both worlds since both economic growth and inflation benefit crypto. This makes cryptocurrency unlike anything else that existed before it.
Lastly, excessive debt and Ponzi schemes.
Out of all the indicators this one, though not at the moment, could be one to look out for down the road. Since most cryptocurrencies are built on what we would call, perceived value, most without a working product or other sources of income, its price rises mostly on speculation. In order to hold its value, it must at some point be embraced by the public. Due to these factors, the price can only continue to rise if the coin or its technology is widely adopted and used. At the moment, Bitcoin is one of the only cryptocurrencies that this does not apply to.
WHAT’S THE BOTTOM LINE?
The conclusion of things is this. The warning indicators for a bubble or crash currently do not exist in the crypto market. Due to the wild swing nature of crypto, these excessive drops can feel like a mini-crash, but at the end of the day, it’s just a healthy correction. For now, when we get these drops something interesting to keep in mind is this. Typically, the further the leg down, the higher the next leg up will be. So when we have a very strong leg down it would be wise to strongly add to our current positions. The stronger the leg down, the more we should be adding.
Remember too there are literally trillions of dollars sitting idle on the sidelines waiting to participate in the crypto markets. On every extreme down leg, we will begin to see this money pouring in. This also means the ups and downs will become more extreme and more frequent.
That’s why the best thing anyone can do is HODL. I will discuss this in my next article.
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