Traditional investors would look for riskier assets when the bull market is in full throttle and investors run for the hills when bears are in town. That is just a simple analogy without complicating anything.
However, smart investors use a slightly different approach. They move their funds from riskier assets to those where they can seek safety. For instance, in a bull market, sectors such as financial, tech and energy are the most favorite sectors. When the market starts to fall off the cliff, portfolio managers and hedge funds start to favor sectors such as consumer staples. They seek stocks with better dividend yield because even though the general trend in the market could be to the downside, they still get a better yield relative to the overall market.
For cryptos, it is very different altogether. First, there is no such thing as dividend yield, so when the price falls, there is no safety. Secondly, it is grueling to come up with a model under which you can use an asset valuation model through which you can define a specific coin as a risk-off investment. Thirdly, the issue of correlation comes to the surface, all cryptos (except for a very few) move in the same direction. This means when Bitcoin is under pressure, the whole cryptocurrency arena falls. The below chart shows the correlation between Bitcoin and Ethereum, the big coins which dominate the cryptocurrency space.
Having said this, one trend which stands tall among any other is that investors have started to understand the crypto space a little more as compared to the preceding years. The reason why I am saying this is because asset-backed coins have become popular and the reason they stand taller during the time when Bitcoin is under immense pressure is that they are pegged to a certain commodity or fiat currency.
For instance, Tether is a coin which is pegged to the dollar. If you look at the market cap of Tether from May 7, 2018, it has moved from $2.1 billion to $2.5 billion. Looking at the price of Bitcoin, its price has moved from $9521 (open price on May 7) to $6134 (low on May 13). So, investors are moving out of Bitcoin.
Fairly recently, there have been some attempts to evaluate the cryptocurrency by measuring the network value. These approaches are at very nascent stages and it is immensely arduous to rely on them yet.
Published at Thu, 14 Jun 2018 15:20:22 +0000