Why You Should Hibernate Through This Crypto Winter

"I can't wait until next paycheck," my buddy told me with a grin during our 15-minute break. "I'm going to put a bunch of it into Doge."

Back where I used to work, we'd always shoot the breeze between shifts. He was a pleasant guy. But this comment took me aback.

The Dogecoin cryptocurrency had been in a nosedive. When my friend and I spoke, it was about 66% off its peak.

I asked why he was doubling down...

"Well," he said, "if I buy more Doge today at 20 cents, it just needs to go a few cents higher... and I'll be rich."

I didn't argue with his logic. And when I reached out to him a few weeks ago, he was still in the trade.

Since our first conversation, Dogecoin has fallen another 60%...

This month, it crashed anew. Cryptocurrencies across the board have entered a "crypto winter" – the name given to the 50%-plus declines in these assets that lead to long bearish stretches.

We can learn a lot from this sell-off. And for investors like my old work buddy, one lesson is key...

The Nasdaq Composite Index has fallen 26% from its peak this January as I write. The S&P 500 Index is down about 15%.

Lately, it has felt like there's nowhere to hide.

When markets fall broadly, it pushes investors into risk-off mode. They lose their appetite for speculative holdings... so they dump them.

That has been a big problem for crypto. These assets are volatile. And that's scaring investors into selling.

Usually, crypto's answer to volatility is for investors to buy lower-risk currencies called "stablecoins." Their value is pegged to an external asset, like dollars or gold.

For every stablecoin minted, an equal amount of real assets is put in reserve. This collateral lets stablecoins trade at a set value. In other words, they can resist the volatility of the larger crypto market.

There are also "algorithmic stablecoins"...

These coins have no collateral. Instead, they defend their peg through a series of computer protocols. These protocols motivate investors to trade the coins in a way that ensures their value. (Typically, that means minting or removing supply for a small arbitrage profit.)

The problem is, algorithmic stablecoins count on investor faith. And a risk-off market throws that faith into crisis...

About two weeks ago, major algorithmic stablecoin TerraUSD slipped from its $1 peg. It first fell to 99 cents... and then 40 cents a few days later.

By morning trading as of last Friday, TerraUSD had crashed to just around three cents. Take a look...

That's a 97% drop in something supposedly as safe as cash.

The TerraUSD collapse helped fuel a trillion-dollar wipeout in the greater crypto space. The crypto winter has arrived... And what happened to this "stablecoin" shows how quickly things can go from bad to worse.

Now, I'm not here to disparage crypto. Digital assets are here to stay. But the current trend is a sharp line downward. And the headwinds are not letting up.

The problem today is the same as when I first spoke with my work buddy about cryptos...

No matter how much you've sunk into a position, buying into a downtrend is a bad idea.

This is a tough market. But it's especially bad for risk-on assets like crypto. And what happened to TerraUSD should be a huge warning to anyone considering the space right now.

Remember: The trend is your friend. It's time to hold off on crypto until it turns back in your favor.

Good investing,

Sean Michael Cummings

Further Reading

"When the crowd is out – and the selling is over – that's when the turnaround can happen," Chris Igou writes. You want to buy hated assets... once the trend reverses. And we could be nearing that moment soon in a group of stocks outside the U.S... Learn more here.

"We're grinding through a painful, volatile market," Brett Eversole says. It's important to limit your losses in periods like these. But history shows today's bad times could lead to massive gains in the long term... Read more here: Two Positives of a Painful Market.

Market Notes
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