A Key Takeaway From the Recent Crypto Craze

Many investors expect significant volatility in crypto, but the past 10 days have seen steep declines and quick climbs highlighting the importance of portfolio diversification.
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Crypto Market Volatility

Hundreds of crypto-related newsletter headlines hit our inboxes last week. If you follow Twitter, you probably saw many of the same colorful discussions and emphatic opinions, (both favorable and not so much) that I did about cryptocurrency that included phrases like these:

“Volatility is a feature, not a bug.”

“Our thoughts on market dislocations and risk management.” 

“First mover: Bitcoin drop below $40k triggers $3B in liquidations.” 

Amidst all the talk about crypto volatility, correction, price movement, implosion—call it what you will based on your own analysis—one sentence from an industry newsletter stood out for me: “It’s important to note, the fundamentals and technology that underpin all of these crypto-assets have not changed, only the narrative.

Implicit in this statement is a view of the long-term viability of crypto as a store of value and/or medium of exchange. I am not a financial advisor. I’m not going to tell you what to invest in, and what I invest in may not be appropriate for you. But I will tell you that when you do invest in something, act with intention based on an informed view. Know why you are investing. This is a lesson many of us had to learn the hard way.

The corollary to this investment approach:

If you invest because someone else tells you to, then you also need them to tell you when to sell. And if your buys and sells are based on someone else’s view, you must know that your interests are aligned. Did Elon Musk tweet his concerns about the energy required to mine bitcoin because:

(a) this was new knowledge to him,

(b) he wanted a setup to buy more bitcoin at a lower price,

(c) he wanted to force a discussion around crypto mining companies using more solar energy,

(d) he has business interests that would benefit from a temporary drop in the price of bitcoin, or

(e) any combination of b, c, and d?

I don’t recall seeing a statement from Musk saying, “Sell.”

The Importance of Portfolio Diversification

Many crypto investors have come to expect significant volatility. The past 10 days have seen steep declines and quick climbs for this asset class. The Alto CryptoIRA® transaction volume on our platform has been about 3x the monthly norm, and buy orders outnumber sell orders by roughly 4:1. The size of the “sells” far exceeds the size of the “buys,” which tells me many long-term investors are using the price movement as an opportunity for dollar-cost averaging, an investment strategy often employed to reduce volatility and poorly-timed lump sum market entry.

Market volatility highlights the importance of portfolio diversification, a proven tool to reduce volatility and increase returns over the long term. Diversification is central to why we created Alto. Everyone—not just professional investors—needs access and opportunities to grow their retirement funds in a broad and balanced way. Don’t put all your eggs in one basket. Don’t bet it all on red. We’ve heard these truisms before, and they’re especially true here. As the experts say, diversify your portfolio by investing in some assets whose value is uncorrelated to pricing in the public markets.

It Can Be Hard to Watch

Sometimes the hardest thing to do is to do nothing, especially when you see an alarming decline in your account balance. This is part of the beauty of illiquid alternative assets like private equity, venture capital, real estate, notes and loans, and other securitized real assets and collectibles—you can’t wake up and panic sell.

Investing for retirement is a long game, and with IRAs, you are by definition long-term investors. If your long-term view of an asset or asset class has not changed, then price corrections are buying opportunities. But if the fundamentals underlying your investment rationale have blown apart, find the exit in an orderly fashion. Or if you simply enjoy the risk/reward that comes with the market timing game, trade away. As we say at Alto, “You do you.” But always—do your homework, and know where you stand.

Eric Satz

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