In order to find trends in the market we typically look to a chart showing the activity of the investment. The chart can give us an idea of how the particular investment has done over time. It also helps establish patterns and predictability thus they are a valuable tool in the investor’s arsenal.
The problem with charts is that they don’t take into consideration external forces effecting the investment. In the case of crypto currency we have something that is very new. Most of the gains made within this asset class have been made in a single year, 2017. How can you accurately predict price action with so little history?
Another thing to take into consideration in charting crypto currencies is that the main driver of price is pure speculation. Most of the Crypto currencies don’t actually have a utility value other than their use of the block chain technology. This makes charting increasingly difficult as high volatility is usually associated with large amount of speculation.
So, what can we do to not lose money? Well we know that Cryptos are very new and highly speculative, this puts them into a risky category. What we have to do is group them with other assets to predict their market direction. This is not implying to chart one crypto currency against another. They’re trending relatively similar and they wouldn’t do us much good. What we need to do is watch over all cash flows.
Just off the top of our heads when we think of wealth what’s the first thing that comes to mind? The answer is probably gold. Gold has been a store of wealth since the beginning of civilization and is not considered to be of much risk. We know that a mine could be depleted of its gold but the gold itself won’t lose total value. With that said when there is an appetite for risk money will flow out of gold and into other assets with higher returns and higher risks. Higher risks usually provide investors with higher capitalization rates.
Simply put, when gold rises, Cryptos will fall. Gold is the safety play and Cryptos are the risk play. I am aware that there are some new gold backed Cryptos that have just come out and there may be some exception there but the idea would still remain the same in general. Last year the price action of gold was flat to lower whereas the Cryptos moved higher. So far, this year we’ve seen only a slight rise in gold and a correction in the crypto markets. When one moves up the other will move down and vice versa.
A rise in gold prices is indicative of a failing currency. However, this does not mean that cash will flow into risk. We’ve never seen money flow into highly speculative investments following any financial disaster. When there is a crisis money moves into hard tangible assets. Anyways, no one can be certain of the future but we can prepare ourselves by learning from the past. This thesis is just my personal opinion, I am not a financial advisor. Please be sure to do your due diligence prior to making any investment and consult your paid professional.
Image source: businessinsider.com