In September of this year, the S&P 500 closed at its lowest level in 2022, and the Dow Jones Industrial Average officially entered a bear market. This has left stockholders wondering how long it will be until we get out of the woods. As a result, many investors have turned their attention to alternative assets — including cryptocurrency.
“The best reason to invest in crypto,” says Josh Peck, founder of TrueCode Capital, is
“growth, growth, growth.” Peck explains that most investors consider crypto for diversification. However, since crypto is highly correlated with other growth assets, it’s not a good diversification in that regard.
As for investing in crypto as a hedge against inflation, Peck points out that Bitcoin is down 70%, while inflation’s at around 10%. “So that thesis does not hold up either,” says Peck.
What he does believe makes a great deal of sense is for investors to peel off a portion of their NASDAQ allocation of high-growth stocks or bonds and consider putting that into cryptocurrency for growth.
“Anytime you allocate to another asset class, you’ll get some benefit to your portfolio and some negatives. So the decision, in my opinion, is not whether I should invest in crypto or not. But rather, how much should I invest in crypto? It’s more of a portfolio construction question,” says Peck.
“Historically, even a tiny percentage of crypto in a portfolio brings improvements to return,” says Peck. He points out that an investment in the S&P 500 has averaged about a 7% rate of return with about a 27% drawdown. If even a small percent of crypto is put into that mix, the return goes from 7.02% to a 7.37%. “What excites me about this is that 1% of the portfolio is providing nearly 5% of the portfolio’s total return,” says Peck.
But investing in cryptocurrency is not without its challenges and risks. Here is Peck’s take on the current state of crypto investing — pros, cons and takeaways.
Pros:
– To date, the crypto market has declined by over 70%, which in past bear markets has proven to be a good time to buy.
– Bitcoin appears to be in week 18 of a bottoming process that lasted 20-30 weeks in past bear markets. Crypto markets tend to go off like a rocket, then crash. “The process does not terminate at one point,” says Peck. “It sells off and sits at the bottom for a period. We appear to be in that phase now. We can’t predict, but we can say that people who accumulate a little bit each month have done well in the past.”
– If Bitcoin returns to the former all-time highs, it could provide a 270% return from today’s market price.
– Mastercard Inc. recently debuted a service offering crypto trading tied to bank accounts. As more big players get into the game, institutional adoption rises. This has historically been positive for price. Essentially, we are inching our way closer to people being able to buy crypto in their everyday brokerage accounts.
Cons:
– Bitcoin dominance has begun to increase, a hallmark of past altcoin capitulations. This crash may not be over.
– Bitcoin’s 200-week moving average has not held. Bitcoin’s price is 23% below the 200-week moving average, which historically was the bottom of past markets. Is this market cycle different somehow? Is the crypto game over because that support level did not hold?
– The Bitcoin crash happened sooner during this market cycle relative to the next halving than during previous cycles, so the bottoming process may take longer than it has historically.
Takeaways:
– Be patient with altcoins and focus on top-tier cryptocurrencies such as Bitcoin and Ethereum.
– The long-term outlook is promising, but there may still be more short-term volatility to come.
– Accumulate a position rather than hoping to time the exact bottom.