Putting Bitcoin movements into the right perspective

What happened to the Bitcoin price?

May 12th: Elon Musk sends with a tweet Bitcoin in a downward spiral after Bitcoin moving sideways for several months hovering around 50-60,000 USD.

May 19th: Reuters: "China has banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading."

Bitcoin reaches at closing a drawdown of more than -30%-points.

May 20th: The German Wirtschaftswoche publishes an article with the title "Folks, these are buying prices"

Should this matter from an investor's perpective?

Let's approach this question by discussing the following aspects:

(1.) Is this price movement abnormal? When looking at the recent history of Bitcoin in conjunction with Etherum, we can observe that (even on daily data) drawdowns of more than -60%-points have ocurred several times in the recent history. So we can conclude, that this drawdown is well within the range of typical behaviour.

(2.) Can we compare these drawdowns with other markets? As we already elaborated in several publications (e.g.: Actively Managed Cryptos), we have to de-leverage or scale down the Bitcoin exposure in order to match the volatility of other assets like equities. If we assume, that the maximum reasonable portfolio share of Bitcoin should not exceed 10%, the portfolio impact would be in the range of -3%-points. So by comparing apples with apples, this recent drawdown is well in line with those of other assets.

(3.) Ist the underlying case for Bitcoin as a new technology broken? Definitely not! As Andreas M. Antonopoulos formulates it: "Bitcoin is the internet of money" and is probably the greatest innovation within our money system. So strong price fluctuations are just a consequence of the fact that this relatively new asset class is dominated by news-driven individual investors.

So the answer to the initial question Should this matter from an investor's perpective? is a little bit "Radio Eriwan Style": In principle no!

Can crypto investors protect themselves from such market downsides?

In principle yes! Correct portfolio design (strategic and tactical asset allocation) is the main tool in protecting an investment. However, this will be a topic for a subsequent article.

In case that you should have questions to the article pls. do not hesitate to contact me.