Navigating the "Crypto Winter" | UAM Investment Insights

20th Sep 2022

The ‘Crypto Winter‘ – and what it means for your investments

In recent months, news headlines have been full of the fact that crypto currencies have seen a sustained drop in value. Since December 2021, Bitcoin has dropped almost 70% and shows no signs of recovery, with other crypto currencies following. But why are crypto currencies tanking quite so badly right now, when it has long been heralded as an alternative to traditional monetary markets?

Suzanne Streeter, senior analyst at Hargreaves Lansdown, comments that increased volatility in other markets is only serving to accelerate uncertainty in crypto markets and, as we head toward recession in key global economies, there is an increasing lack of confidence in both the currencies themselves and the asset management and brokerage platforms that serve them.  Recent news highlights how leading platforms RobinHood and Coinbase are struggling to weather the so called ‘Crypto Winter’. This is a worrying development – if they fail, investors may not be able to access their funds in the future, even if they still hold any value.

These current economic ‘stress test’ times could have helped crypto to become the new “gold” inflation-proof asset trade. Typical ‘safe haven’ investors, whether large corporate fund managers or smart retail investors, know that gold is typically a strong inflation-proof asset and buy and hold through times of volatility. Crypto investors on the other hand tend to be speculators and have sold down their holdings quickly as interest rates have increased – meaning that they have performed considerably worse than the NASDAQ growth equities.

The crypto ‘wild west’ has long been regarded as one of the most risky investment fields out there – and with risk there has been reward, but even expert commentators in this space are not looking at any kind of recovery until 2024. And at that point it is unclear as to whether Bitcoin will ever recover to the $60,000+ high we saw in 2021.

The fact that many countries themselves are turning to aggressive monetary policies to try to manage the impacts of inflation means that investors are turning away from high-risk opportunities to more traditional, ‘safe haven’ opportunities.

There is also the threat of increased regulation challenging the market. Multiple regulators are looking to put in place financial rules around the buying and selling of crypto currencies that could have an impact on prices in the future.

So where should you put your money when things are so uncertain?

In times of uncertainty, it is crucial your investment risk is spread across a range of investment opportunities.  Investing typically follows a 7 to 10-year global cycle, and in periods of volatility money heads to investments with more certainty, such as government bonds, gold, and property. Despite other markets dropping, property in key markets is holding firm, with prices in places like the UK continuing to rise in value. In times like these, it’s crucial that you keep in regular contact with your Financial Adviser, who can make sure that your investments are weathering the storm and help you build a diversified asset pool that has the right mix of emergency cash cushion, low risk inflation proof assets and liquid value assets, as well as property.

This article first appeared in Dockwalk Magazine in September 2022



James Maxwell