China, one of the biggest cryptocurrency markets, announced that it was making cryptocurrency transactions illegal, which sent the price of major cryptocurrencies tumbling.
The decision is bad news for crypto investors, but there are lessons for all of us to take from the Chinese ban that can make us better at investing and managing our wealth.
Don’t put all of your eggs into one basket
Sudden shocks can happen in any type of market, although cryptocurrencies tend to be more volatile than most. Investing in a diverse portfolio of stocks and other assets across a wide range of sectors and regions can help to ensure that you are not caught out when an unexpected change occurs, such as the China ban.
Always take government policies into account when investing
Investments are often impacted by external factors, in this case China’s decision to ban transactions using cryptocurrencies.
It’s not the first shock that the Chinese government has caused investors in recent months, with a policy banning tuition back in July badly hitting companies selling these services into China.
Ensuring you take political risk into account when investing can prevent you from getting your fingers burnt.
Holding your nerve often pays off
While Bitcoin’s price tumbled on the China announcement, it has since partially recovered. Those investors who sold in the initial panic will have crystallised those losses, rather than having the chance to see if the price recovered.
It’s a similar pattern as was seen with stock markets at the beginning of the coronavirus crisis, where an initial fall led to later recovery.
It can be hard, as an investor, to take a long-term view during times of crisis, but a financial adviser can help you to think about further horizons when sudden shocks occur.
Cryptocurrency is best left to the experts
The volatility in the cryptocurrency market is easy to see when events like this happen, and this is one reason why the FCA (Financial Conduct Authority) which is the UK’s financial regulator, is concerned about ordinary investors buying into the currencies.
In January, the regulator put out another statement saying that investors must understand what they are investing in, the risks associated with investments, and the protections that apply.
The FCA said that significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
Liquidity is important
If you are going to invest in volatile assets, you will need to have a plan to deal with the ups and downs, rather than needing to sell out at just the wrong time because you need the cash.
Holding your savings in Bitcoin, and suddenly needing them to buy a house last week would have resulted in you losing a huge amount of money, so it is important to always have alternative sources of cash to use in the short term.
Your plan for your finances should include enough money for short-term expenditure, as well as a chunk set aside in an easy-access account for emergencies.