Cryptocurrency volatility is not necessarily a bad thing – but it could be if your investment decisions are driven by the whims of Elon Musk.
The comments come as Bitcoin, the biggest cryptocurrency by market capitalisation, regains some ground after falling to a four-month low.
The price of Bitcoin dropped by nearly 30% on Wednesday from the day’s early highs, before clawing back losses of 8%.
The dramatic swings come as China warned about the usefulness of digital currencies, which subsequently prompted a tweet by Tesla founder Elon Musk indicating that his electric vehicle firm was continuing to hold Bitcoin (it bought $1.5bn of it earlier this year) for the long term and would not be selling its position.
The so-called ‘cryptocrash’ is creating a lot of noise but volatility in the cryptocurrency market should be treated in the same way as turbulence in any other market.
As with any type of investing, the investor’s best tool in order to sidestep potential risks and take advantage of opportunities that arise in times of market volatility, is diversification.
Cryptocurrency investors should ensure they are diversified across the principal digital tokens, for example Ethereum, and as part of a wider investment portfolio of assets, sectors and regions.
Some of the shrewdest investors have consistently utilised market volatility as major buying opportunities in traditional financial markets - and the cryptocurrency market should be no different.
However when the volatility is driven by one celeb enthusiast, investors should exercise caution.
When used effectively and efficiently, volatility can be an extremely powerful investment strategy.
But I would urge investors not to be driven by any one influential advocate, such as Elon Musk, whose whims and moods can trigger dramatic swings in both directions.
Sound investment decisions are not made on hype and hysteria from one celebrity enthusiast on social media, rather time-honoured fundamentals such as diversification, sensible valuations and profitability.
Previously, I had observed that inherent traits of cryptocurrencies are ever-more attractive. These characteristics include that they’re borderless, making them perfectly suited to a globalised world of commerce, trade, and people; that they are digital, making them an ideal match to the increasing digitalisation of our world; and that demographics are on the side of cryptocurrencies as younger people are more likely to embrace them than older generations.
Whether it is Bitcoin, or any of the current generation of tokens, or not, cryptocurrencies are here to stay.
Meanwhile, financial traditionalists are viewing cryptocurrencies the way traditional stores used to view online retailers such as Amazon.
But digital currencies have already changed forever the way the world handles money, makes transactions, does business, and manages assets.
Nigel Green is the chief executive and founder of deVere Group
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