Multiday Crypto Dips = Major Crash Predictor?

Cryptocurrencies have a lot of profit potential, but crypto price dips can be tough to stomach.

My colleague and Banyan Hill Publishing crypto expert Ian King says cryptos are the most volatile market that he has ever traded in his career.

In this week’s Ask Adam Anything, I tackle a question from a reader who is worried about multiday price crashes.

Let’s see what’s going on in the wild crypto market.

Green Zone Fortunes and Crypto Dips

Matt: This question comes from a subscriber to your Green Zone Fortunes service.

Thomas asks:

Hello, I’m a subscriber to Adam’s Green Zone Fortunes and feeling a panic. Can you tell me what Adam or the brains at Money & Markets make of the past two days of back-to-back dips of 11% and 6% in the crypto market? Is this the beginning of a major crash like March of 2020? Do you recommend selling or holding if it continues?

Adam: There’s a good bit of complexity and a number of veins within that question. I’m happy to kind of unpack them.

First, I want to speak to what we seek to do in Green Zone Fortunes. We are building a well-rounded portfolio of stocks that we intend to hold for anywhere between six months and three years, certainly longer if possible.

We’re looking for companies that are operating in mega trends that have above-average growth rates and that are on the cutting edge of new innovative technologies. These companies are opportunistic in disruptive fields.

Let’s use energy as an example.

Traditional energy markets went through a disruptive period in the March 2020 crash, and we’ve recommended a couple of traditional energy companies.

Even though we are very bullish on electric vehicles (EVs) and green tech, we know that the disruptions in the traditional oil and gas sector were too lucrative to pass up.

We’re building a balanced portfolio that’s meant to weather the market’s ups and downs.

We use our Green Zone Ratings system, which looks at momentum, size, volatility, quality, value and growth. So we’re looking for well-rounded stocks.

And because of that, we’re not in the business of trying to forecast the next market downturn. We don’t believe that that’s the best way to invest. It’s not easy to predict a major downturn, so we do not try to do that.

It’s Hard to Predict a Crash in Any Asset

How many people did or did not see the March 2020 crash coming? It was one of those fastest and sharpest bear markets in history.

So, I would encourage this reader not to worry so much about whether an 11% or 15% drop over a couple of days in the crypto markets is going to tank the equity markets.

This is a volatile market. Remember, Ian called cryptos the most volatile market that he has ever traded in his career.

I started off trading Forex with quite a bit of leverage, so that’s certainly what the crypto market feels like to me.

Ian said something else that I think is good to put in the back of your mind if you’re dipping your toes into the water of crypto.

With a volatile asset like stocks, it’s often three steps forward and then one or two steps back. Well, you can think of the crypto markets as two, three or four orders of magnitude more volatile than that. So it’s maybe nine steps forward and four, five or six back. Maybe it’s even 15 steps forward and 10 or 12 back.

That’s why we study the trend.

Crypto’s Trend

I’m looking at Bitcoin and Ethereum prices, and we’re still in an uptrend. We’re still in a bullish market. Both coins made new highs recently. This most recent pullback is basically just a retest of those highs.

So on Bitcoin, if we stay above $30,000 to $40,000, the longer-term uptrend is still intact.

The key is position sizing. If you position yourself small enough that these large swings don’t affect your psychology and your day-to-day life, then you can be in it for the long run.  You can position yourself in an asset class that is unlike anything else, and it has a lot of promise.

If you’d like to learn more from Ian, click here to watch his “Crypto’s Third Wave” presentation now.

Personally, I don’t see anything that I’m too concerned about as far as the trends and momentum in the crypto market, nor in the stock market at this time.

What About Stocks?

Matt: What if we were to see this in the stock side of things? What if we were to see this in the S&P or the Dow? Would that bring about a bit of a change in perspective?

Adam: Well, sure.

In the equity markets, a typical correction is a move of 10% off the highs. A typical bear market, by definition, is a 20% move.

If you’re seeing this type of volatility in the equity markets, it’s more cause to be concerned. It’s all relative, and that’s the point.

I mean, if you look at a 50-day moving average and a 200-day moving average of crypto, it’s going to basically give you the same indication of trend and momentum as if you use those averages on a stock index like the S&P 500.

So, as we’re recording this right now, Bitcoin has fallen15% off of its highs. But it’s still above its 50-day moving average, which is still itself above its 200-day moving average. It’s making higher highs and higher lows.

I’m a technical analyst, so that to me is a bullish trend that you want to be invested in. You would start to manage your risk when the lows are taken out, when you’re making lower lows and lower highs, and you have momentum divergences.

But nonetheless, it’s just the size of the moves. You can’t look at the numbers. You have to look at the trend lines and the moving averages. It’ll give you the same type of analysis as you can do in the stock market.

To good profits,

Adam O’Dell

Chief Investment Strategist

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