Why Did the Cryptocurrencies of the World have a Great Fall?

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Image:Reuters

What’s going on here?

Crypto takes the centre stage again. After seeing a wonderful run-up all through 2020, major cryptocurrencies took a major drop in values.

The market cap of crypto coins plunged by trillion dollars.
With the coins, shares of companies like Coinbase (recently listed crypto exchange) to PayPal and Square (fintech who allow payments in crypto) fell.
Indian crypto exchanges WazirX & CoinDCX faced ”downtime” as trading volumes surged 400% in response to the falling prices globally.

What’s behind the fall of major crypto coins?

Bitcoin the leading crypto coin fell 40% on Wednesday this week. What traded at a peak of $63k in April this year, reached close to $30k. Other coins like Ether, Dogecoin fell 40 -45%. Bitcoins are known to be volatile. But, a drop like what we saw last week was total carnage.

The China Banking Association warning

It’s a known fact that central banks around the world including our own RBI are not impressed by the rise of crypto coins and are looking to come up with their own versions of digital currencies. China, in fact, has its own Digital Yuan based on blockchain.

In the light of these issues, China Banking Association barred all its members from giving any services, such as trading, registration, clearing, or settlement related to private cryptocurrencies. This wasn’t the first time this warning came from the CBA, but now the rules are more stringent and convey the fact that virtual currencies are not supported by real value.

The Elon Musk effect

You can take the Bitcoin out of Tesla but you can’t take Elon Musk out of anything related to crypto coins.

Earlier in February, Musk announced that Tesla would accept Bitcoins as payment for Tesla cars which acted as a big boost to Bitcoin prices. Since then, Elon has shown support to Dogecoin, another crypto more popular as a meme.

Recently, Tesla went back on its announcement made in Feb and said it would stop accepting Bitcoins as payment for Tesla as crypto mining was not environment friendly. Incidentally, bitcoin mining uses up 121 terawatt-hours (TWh) annually, which would rank it in the top 30 electricity consumers worldwide if it were a country according to Cambridge University.

How does this affect you and me?

If you are a crypto investor based out of India, you would seen a drop in the value of your crypto portfolio.

Cryptos can get extremely volatile. Also, some banks like the PayTm Payments Bank withdrew their support to the Indian cryptocurrency exchange WazirX, there may be more in the line. The Crypto Currency Regulation Bill is in the works and may end up with a ban on private cryptocurrencies in India. So make your decision to further invest in cryptocurrencies based on these factors and the value you see in the asset rather than on the hype.

You Ask – We Answer

How can I reduce risk in mutual fund investments? – Sandeep Sodhi

Risks and investments go hand in hand.

The amount you invest in mutual funds is ultimately invested in the market (equities or debt) depending upon the funds chosen by you. There are risks that come in with these investments which could be volatility for equity investments. Or it could be the interest rate risk (risk of fluctuation of interest rate) or credit risk (risk of principal/interest not paid) for debt investments.

You can reduce risk in mutual fund investments by

Diversification

Mutual funds come in different types which can help you spread your investments across types of mutual funds like equity funds, debt funds, gold funds, etc. In a diversified portfolio, not all assets move in the same direction. For Ex: Last year when Covid-19 hit us, we saw equities go down but gold and debt held up. So, your diversified investments end up earning a balanced return.

Choosing the right fund for the right term

You could also reduce your risk by choosing the right investment avenue for your needs according to when you need the funds. For Ex: If you invest in an equity fund for a short-term need, you may not get the funds when you need them if the markets are at a low. Equity mutual funds for long-term and debt funds for the short-term requirements work well.

Rupee cost averaging

Rupee cost averaging is nothing but actively spreading out your investment over a period of time. This way of investing allows you to invest at the lows and highs of the market. This helps you average your cost of investment and insulate your investment from short-term price fluctuations.

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