Cryptocurrencies have been volatile in 2021, seeing several boom-bust cycles. While crypto assets crashed following news of China’s crackdown on cryptocurrency trading and mining, they're now rebounding. The massive volatility has left many investors wondering whether they should sell their cryptocurrencies now, or take advantage of the lower prices and buy more.
Over the last year, cryptocurrency trading has surged, with soaring returns and crypto exchange Coinbase going public. However, many investors still shy away from them.
Why have cryptocurrencies been so volatile?
Almost all assets have some metrics that can be used to value them fundamentally. Even gold, which Warren Buffett sees as a dead asset, can be valued using its mining cost curve as the base rate. However, for cryptocurrencies, things are different—they mainly move on speculation, news, and celebrity endorsements. As can be expected, they're more volatile.
When to sell cryptocurrencies
To know if you should sell your cryptocurrencies, keep in mind that they're similar to other assets. Therefore, you may want to ask yourself why you bought cryptocurrencies in the first place. If you bought cryptocurrencies because you believed in their future, you should next check if anything changed about your investment thesis.
The effects of China’s crackdown and Tesla's snub
If your thesis hasn't changed, you should note that the crypto space itself has changed—China is continuing its crackdown on cryptocurrencies, focusing on loopholes this time, and Elon Musk broke up with Bitcoin over its energy consumption.
Cryptocurrencies' anonymity has also prompted calls for their regulation (Berkshire Hathaway vice chairman Charlie Munger sees cryptocurrencies as a good payment method for only criminals). Recent developments have raised doubts about cryptocurrencies being as untraceable as many believed, however—the U.S. Justice Department has somehow traced back most of the bitcoins that were paid as ramson for the Colonial Pipeline attack.
The crypto space has seen some positive developments, too, with El Salvador accepting Bitcoin as a legal tender. Also positive is the counter view to China’s crackdown on cryptocurrency mining, in that many believe it will help shift mining to places with a greener energy mix than fossil-fuel reliant China.
Should you sell your cryptocurrencies now?
Most cryptocurrencies have plummeted more than 50 percent from their peaks.
If you're a firm believer in cryptocurrencies' future, you could use their recent crash as a buying opportunity. However, if you've realized amid their downturn that you misunderstood them as an asset class or are not comfortable with such volatility, you may be better off selling them and investing in something you understand. Whereas that's old advice, it's also tried, tested, and true—and from the Oracle of Omaha himself.