What is the right time to invest in crypto?
The very strong performance of cryptocurrencies over the past year has attracted a lot of interest, but also posed the question: is it too late to invest now?
In this update, we offer thoughts on how an investor might think about timing an entry into the crypto market.
The investment objective and the specific decision that the investor is looking to make dictate different approaches. The investor’s objective may be to:
Decide whether to embrace crypto as an asset class and add it to the portfolio
Over or under allocate crypto assets based on the outlook for the market
Seek short-term trading profits
When deciding whether to add crypto as an asset class to portfolios, part of the answer is independent of price levels, and is driven by considerations about whether the asset class is mature and liquid enough, and whether it provides diversification to portfolios. However, long-term return expectations are also relevant. The current early-stage nature of the technology underpinning crypto assets, the significant potential for the technology to be the rails of tomorrow’s economy, and the trajectory that disruptive technologies (and the financial assets that leverage them) typically follow all suggest strong long-term potential for the crypto asset class. In this regard, the exact entry point is not very important.
Investing in crypto assets with a medium-term horizon requires an assessment of the fundamental factors driving the market, such as:
Adoption: expectation about the growth of applications being built on blockchain-based smart contract platforms, expectation about future use of cryptocurrencies in payments and as a store of value
Innovation: expectation about technological progress enabling better scalability, lower cost, higher efficiency, and more use cases
Regulation: expectation about the future stance of regulators with regard to various market segments and crypto assets in general
Value creation: comparing valuation estimates for cryptocurrencies to current market prices
Macro factors: expectation of how cryptocurrencies would respond to changes in inflation, growth, fiat money supply, or government debt
Fund flows: expected flows in or out of the crypto market
If the investor is seeking short-term profits, monitoring market sentiment is the primary factor. There are many tools to rely on, such as the Fear & Greed Index, put-call skew, support and resistance levels, buy/sell order balance, Relative Strength Index, and many other technical indicators and oscillators developed to determine the direction of a given asset’s momentum.
In addition to judgments about the short, medium, or long-term direction of the market, certain strategies can mitigate the risk of getting the timing wrong:
Averaging in: mitigating uncertainty about market timing through executing the investment over a period of time, in particular using lower prices to improve the average entry price
Investment products with an asymmetric return profile: in addition to fund products that offer an asymmetric participation in market upside vs downside, structured products with varying degrees of downside protection can also be purchased over the counter
Diversification: spreading the exposure across different segments of the crypto market, with exposure to different, and to some degree uncorrelated underlying trends
Nevertheless, it is important to note that the biggest risk of market timing is usually not being in the market at critical times and missing periods of exceptional returns. This is because it is very hard to accurately pinpoint a market high or low point until after it has already occurred.
This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.