Bitcoin’s Plunge Sparks Wider Selloff

Bitcoin plunged to its lowest level since February on Wednesday, hitting a low of $30,200, down by more than half from an all-time high of $64,829 it reached just last month.

Ether, the second most valuable cryptocurrency, was down 21% as well on Wednesday.

The fallout was hitting stocks that have ridden the crypto boom. Square (ticker: SQ) dropped 4% and PayPal Holdings (PYPL) was off 1.5%. Companies with even more of their business models tied to the price of cryptocurrencies dropped even more precipitously, with crypto exchange Coinbase Global (COIN) falling 8% and business software firm MicroStrategy (MSTR), which has bought billions worth of Bitcoin, down 11%.

MicroStrategy’s CEO MIchael Saylor, among the most important evangelists for crypto had a short message on Twitter: “I’m not selling.”

Some crypto users couldn’t sell even if they wanted to. Coinbase users complained about trouble accessing the app. The company said “some features may not be functioning completely normal” and it is investigating.

Bitcoin had recovered to about $36,000 by 10:45 a.m. Eastern time, still down 19% in the past 24 hours. But even getting a definitive price was tricky. CoinDesk, among the most popular sites for crypto information, was down for part of the morning, and was showing different prices than coinmarketcap.com, another hub for data, and Coinbase. At about the same time, Coinbase was showing $36,998, while coinmarketcap showed $36,429—the kind of spread that used to happen in crypto but that had diminished in the past couple of years as the market became more liquid.

All of the gains Bitcoin accrued since Tesla (TSLA) got involved with the cryptocurrency have now been erased. And as with many things in crypto, it’s difficult to pinpoint the catalyst for the selloff.

Matt Hougan, chief investment officer of crypto fund provider Bitwise Asset Management, told Barron’s that the drop was caused by “short-term forced and panicked selling by retail investors who entered the market in the past year, spooked by a mix of bad news and misinformation, and turbocharged by the procyclical leverage that’s an inherent feature of the crypto market.”

Looking at patterns on the Bitcoin blockchain itself, he said he sees funds moving from overseas retail investors to institutions in the United States, “which is a good thing for the long-term. But in the short-term, volatility is a part of the market.”

The market has been dropping since Elon Musk began questioning Bitcoin’s negative environmental impacts about a week ago. One more recent catalyst may have been China’s decision to reiterate its ban on financial institutions facilitating crypto transactions.

In the crypto market, momentum can turn quickly and selloffs can accelerate as people try to lock in gains made in the latest bull market. Anyone who bought cryptocurrencies in 2020 is still showing a large paper profit, but maybe getting anxious that those gains won’t hold for long.

This “no doubt this will scare investors just as all pullbacks in all markets scare investors” Jim Paulsen, chief investment strategist at The Leuthold Group, wrote in an email to Barron’s. Paulsen is a more traditional investor who has warmed to Bitcoin in the past year. The selloff isn’t shaking his interest in crypto — he still thinks it’s worth allocating 1% or 2% of a portfolio into it. And he likes that the volatility makes it possible to rebalance frequently when prices go up and down.

One thing Paulsen is watching for is whether the selloff bleeds into the larger market. The S&P 500 was down 1.3% on Wednesday morning. “Note that the other 3 times crypto did this, the stock market suffered a correction or a bear market,” he wrote. “So part of the crypto story may depend on what the stock market does from here? Does it recover soon or is this a full-blown, longer-lasting correction for stocks?”

Saylor and other Bitcoin bulls have said that Bitcoin is an effective hedge against inflation, because the number of Bitcoins is capped at 21 million, theoretically making it impervious to the “money-printing” common with fiat currencies. Prominent hedge-fund managers like Stanley Druckenmiller have bought Bitcoin under that premise, and some analysts have found that Bitcoin has been stealing gold’s thunder.

But as inflation fears grow in the United States, there is evidence that institutional investors are returning to their familiar inflation hedge.

Investors have been pulling money out of Bitcoin futures and funds and putting more of it into gold, according to a new analysis by J.P. Morgan strategist Nikolaos Panigirtzoglou. That’s a shift from the prior two quarters, he wrote. On Wednesday, the spot price of gold was up 0.8% to $1,883.20 per ounce.

Superannuation is the first thought when it comes to self-funding retirement. Yet it is hardly the only option for doing so.

Just as we have a choice in how and where we work to earn a living, many people also have a choice in how to fund their retirement.

It is possible and sometimes preferable to leave your superannuation untouched, allowing it to continue growing. Some or all of your income can come from alternative sources instead.

Here are some alternatives you can consider.

1. Downsize your home

For many who own their own homes, the equity accrued over decades can eclipse the funds in superannuation. However, it’s theoretical money only until it is unlocked.

Selling up the family home and downsizing – or rightsizing – for retirement allows you to pocket those gains tax-free and simultaneously relocate to a more suitable home with lower upkeep costs.

Up to $300,000 from the proceeds can be contributed by a downsizer to boost your super, and the remainder can be used to fund living expenses or actively invested.

Remember that while the sale proceeds of your home are tax-free, any future profits or interest earned from that money will be taxable.

2. Part-time work

Semi-retirement allows you to gradually step into retirement. You continue earning income and super while working part-time, keeping a foot in the workforce while testing the waters of your new found free time.

Doing so also offers scope to move into different roles, such as passing on your skills to future generations by teaching/training others in your field of expertise, or taking employment in a new area that interests you and is closer to home.

3. Self-employment

Retirement from a full-time position presents a good opportunity to pursue self-employment. With more time and fewer commitments on your hands, you have greater scope to turn your hobby into a business or leverage your professional skills and reputation as an external consultant.

Also, for the self-employed and those with a family business, director’s loan repayments from the company are typically tax-free, offering a potentially lucrative source of

income and a means of extracting previous investments into the business without selling your ownership stake.

4. Investments

Rental property income (from residential or commercial properties) can supplement or even provide a generous source of income. The same applies to dividends from shares.

These are likely to be more profitable if you own them well before retirement.

Income that is surplus to your everyday needs can be reinvested using tax-effective strategies to grow your future returns.

5. Family trust

A family trust could be used to house investments for yourself and other relatives, building intergenerational wealth.

Trusts allow funds to be allocated to beneficiaries to manage marginal tax rates and stretch the money further, you have control over how income is split between different family members and have flexibility for changing circumstances.

6. Selling collectables

You may not realise the value of items you have collected over the years, such as wine, artwork, jewellery, vintage cars, and antiques.

Rather than have them collect dust or pay to store them, they could be sold to fund your living costs or new investments.

Where possible, avoid selling growth assets in a depressed market – wait until you can extract maximum value.

7. Obtaining a part-pension

Part-pensions are not only possible but valuable in making your superannuation stretch further. They still entitle you to a concession card with benefits in healthcare, transport, and more.

Take these savings even further by requesting pensioner discounts with other companies, on everything from utilities to travel and insurance to eating out.

Also, don’t overestimate the value of your assets as part of the means test. It’s a common mistake that can wrongly deny you a full or part-pension.

Plan ahead

However, you ultimately fund your retirement, planning is crucial. Advice would hopefully pay for itself.

Understand your spending and how those habits will change before and during retirement, then look to investments that offer the best fit.

Consider a mixture of strategies to diversify your risk, manage your tax liabilities and ensure ongoing income.

Above all, timing is key. The further ahead you plan, the more time you have to embrace additional opportunities and do things at the right time to maximise their value. You’ve worked hard and now is your chance to enjoy the fruits of your labour!

Helen Baker is a licensed Australian financial adviser and author of the new book, Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99). Find out more at www.onyourowntwofeet.com.au