3 Reasons Why I Trimmed My Crypto Position Significantly

In any investing venture, the most difficult part is recognizing when conditions are simply not favoring your position, thereby necessitating critical changes. With the cryptocurrency sector, market participants can no longer pretend that everything is moving smoothly, that the rumblings are merely part and parcel of the blockchain experience. It’s not. And those who take action now may be able to salvage a strong position for a later entry point.

Currently, everyone’s eyes seemingly have tuned into the World Cup, the quadrennial soccer (or football for the international audience) tournament. In an edition that has already seen some wild upsets, the most recent one (as of this writing) came from Japan defeating powerhouse Germany, a country that lifted the cup four times. How did such a dramatic result materialize?

While any soccer game comes down to the players’ quality (and occasionally some luck),  Japan manager Hajime Moriyasu made five second-half substitutions that completely changed the tenor and tempo of the game. Essentially, Moriyasu recognized his team’s deficiencies and made gutsy but smart decisions, thus converting what appeared to be a Germany-favoring rout to a shocking victory for Japan.

Under the same philosophy, investors must adjust to the realities of the cryptocurrency market. Continuing to engage this sector in the same way – by hoping valuations will rise – will likely not pan out well. Instead, investors should start thinking about living to fight another day. Here are three reasons why.

Cryptos Have Become All-or-Nothing Wagers

As more details about the distressing FTX bankruptcy emerge, a new and frightening narrative rose to the forefront: even the very platform that people stand on can be removed, thus leading to violent losses. So, it stands to reason those that have their money in non-FTX wallet services should seriously consider mitigation measures.

According to an NPR report, FTX investors can’t access their money, leading to fears that they’ve lost everything they put into the platform. While not related, similar services will be suspect. Given that this is not the first time that a crypto-related enterprise completely melted down, both investors and platform users will be in no mood to exercise patience.

Unlike a traditional equities-based investment, piling into a volatile asset like cryptocurrencies brings tremendous market risks. But hardly anyone thinks about the exchange itself going under. But in this jittery environment, that’s exactly what’s happening with FTX – and may happen to other services.

At the end of the day, it’s just not worth the risk.

The ‘Fools’ Have Wised Up

Under the stock market, investors mostly put their funds in certain securities because they believe that the underlying enterprises will continue to grow and/or churn out consistent earnings, thus facilitating passive income via dividends. While they hope that other investors will recognize the opportunity, it’s usually the business itself that sparks confidence.

On the other hand, cryptos are purely risk-on assets. Therefore, they rise based on the greater fool theory. In other words, you’re buying something simply on the speculation that another person will buy that same asset from you at a higher price.

Now, earlier in the crypto game, it may have been possible that investors bought these assets based on the fundamental implications of the underlying blockchain technology. But with nearly 22,000 cryptos being traded at this time, any fundamental argument simply gets watered down.

Instead, you’re just left to hoping that these cryptos rise because someone out there sees value in them. However, with the FTX disaster, many potential fools have wised up. Ultimately, then, even the speculative charm of cryptos has diminished significantly.

Cold Storage Makes Matters Worse

Recently, a Motley Fool article urged readers to take home the painful lessons that the FTX bankruptcy effectively wrote. And one of the key lessons is to avoid keeping crypto assets in exchanges but rather transfer them to dedicated crypto wallets – the so-called cold storage option. This way, you control your blockchain assets rather than a custodial service.

From an individual perspective, this could be an effective measure – though you better keep your passwords safe and never lose them. However, from a broader perspective, the transition from hot services to cold will likely only exacerbate the current crypto winter.

Without robust buying and selling, a market gradually erodes into irrelevance. Further, cryptos moving toward the sidelines and away from active trading probably won’t make these assets worth more due to the artificial supply reduction. Rather, they could lose value because the lack of active trading would dramatically reduce the excitement component that drives cryptos to ridiculous heights.

As well, cold storage would render moot the point about crypto exchanges. This too would pressure the wider industry, causing huge problems for market valuations. Therefore, it’s just not worth the risk.

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