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Last week was certainly a wild one for cryptocurrencies, with Bitcoin proving to be very volatile. The popular cryptocurrency plummeted around 20%. Luno Africa‘s General Manager, Marius Reitz, joined the BizNews Power Hour to discuss the decline in Bitcoin’s price. “Even after such a drop, it’s hard to believe that it’s still up 72% year to date.” Reitz also says that the market has been in extreme greed territory for quite some time. – Jarryd Neves
Marius Reitz on the price of Bitcoin:
It’s been an interesting week. As you rightly said, the Bitcoin price is down 20% over the last five days. Even after such a drop, it’s still hard to believe that it’s still up 72% year to date. I think people forget that often. I think we’ve been in extreme greed territory for quite a long period now. Many commentators have said that the market was bound to correct and that this recent price drop is well within the bounds of the typical volatility that we’ve become used to the Bitcoin market. It has been an ongoing theme.
I think if we look back to 2017 – and during the previous bull run – we saw several twenty to thirty percent drawdowns over the course of that year. Whether this is triggering a new bear cycle, I’m not sure. If we look back over the last year, over the global and the current financial crisis, it’s really created the perfect storm for crypto and all of the uncertainty. You mentioned taxes in the US, economic recovery packages, vaccines, weakening currency, etc. We see this not only in the price, but we see new retail investors buying Bitcoin as an inflation hedge.
Certainly not everyone, but some gold investors, we now also see taking up small positions in crypto. It’s not a case of Bitcoin replacing gold, but I think over time we’ll see that flip and a new distribution channel. We’ve seen PayPal enter this space. Last week, we saw Venmo. I think there’s still a strong demand. We’ve seen better distribution – or easier access and safer access, hopefully. I think we still have lots of momentum.
On the volatility of Bitcoin:
You see a lot of greed in the markets. A lot of first time investors – people that have never bought shares or any other investments – [are] entering the crypto space and putting in money. The saying that you don’t invest money that you can’t afford to lose is now truer than ever. If you look across emerging markets, not only in SA but across Africa, we are seeing a lot of first time investors. It could be because of lower minimums or easier access.
Over the last year, lots of people went on about the institutional demand – and that is true. We’ve seen lots of institutional buying. But in emerging markets, where they don’t have that level of sophistication with regard to regulations, we’ve seen more retail demand and a mixture. We’ve seen speculators – which we can classify as the greed side – and then more sophisticated buyers as well. We see this in the data. We see people buying a set amount of Bitcoin on a monthly basis on payday.
We also see people monitoring the price of Bitcoin. Whenever the price drops, people buy in the dip. We can see all the activity. It’s certainly a mixture of greed – people wanting to make a quick buck in the short run and they burn their fingers – but then we’re also seeing investors, people actually taking small positions – single digit percentage positions – in cryptocurrency and we’re seeing more of that compared to 2017.
On the ‘greed cycle’:
The greed cycle is FOMO – so it’s the fear of missing out. It’s people hearing about crypto over the radio, reading about in the news – but they don’t understand the technology behind it. They don’t understand the risks involved. Because cryptocurrency is fairly easy to access (we’ve actually had easier access over the last couple of years) people started buying it through word of mouth and didn’t understand the risk.
But on the other hand, you can also argue that the greed cycle, to some degree, fuelled the markets and it led to better use cases. It’s lead to increased market capitalisation [and] increased liquidity. It’s become easier to exit positions, buy and sell – which isn’t ideal because, sure, some people would have lost money. But, you see that in currency [and in] forex. We saw that over the last year in the US, where everyone rushed off to investment apps to buy stock. It’s not limited to crypto only, but there’s certainly a big element in crypto for that as well.
On warning investors about Bitcoin volatility:
Firstly, we can’t give any financial advice. We provide the infrastructure [and] the product. People can make their own decisions, to buy and sell. We don’t advisors advising clients when to buy in and how much to buy. When someone’s not sure we would guide them and say these are some of the methods, for example, around cost averaging. Some people use that strategy very effectively, where they buy a fixed amount of crypto on a monthly basis and average their cost price over a period of time. Certainly, it’s very important to highlight the risks. Crypto is still very volatile. It’s still a fairly young market, despite being around for twelve years now. The volatility or reduced volatility won’t be the magic of the market. It will take time, as more people enter the market. We should see the volatility come down over time.
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