Grant McGurn is glad he took advantage of a FaceTime call with his father.
The 27-year-old office manager from Madison, Wisconsin, had put all of his money into cryptocurrencies like bitcoin, ethereum, and dogecoin, a joke coin whose meteoric rise he found amusing if not “ridiculous.” His father, a seasoned investor, was alarmed by this.
“He knew I had all my money in there and he was just like, ‘I’ve seen this before with the dot-com bubble crash, and I don’t want to see you lose thousands of dollars,’ ” McGurn told CNN Business.
He took heed of the warning and sold his crypto holdings in the middle of last month, just as a massive sell-off began. Many digital coins lost nearly half of their value, if not more, in the end.
McGurn said, “I was fortunate.” “I don’t think I’m anything like the average person.”
McGurn is one of a growing number of cryptocurrency investors. They were drawn into the market by the massive gains that began in late 2020 or the excitement surrounding Dogecoin, hoping to make quick money or avoid missing out on the next big thing.
Following their first major sell-off, some people are swearing off crypto investing for good, while others are steadfastly holding on, believing in its potential.
“I don’t want to panic out of something I just ventured into,” said Akshaya Parthasarathy, a 24-year-old living in Chennai, India.
After a sluggish few years, bitcoin exploded last December, setting a string of new highs as risky investments soared in the aftermath of the US election. When Tesla (TSLA) announced that it would begin accepting bitcoin payments for its cars, the craze exploded. Other major corporations, such as Mastercard (MA) and BNY Mellon (BK), the oldest US bank, have announced plans to enter the crypto market, indicating growing mainstream acceptance.
After dabbling in GameStop (GME) in late January, many amateur investors were on the lookout for the next internet obsession. 9.5 million people traded cryptocurrencies on the Robinhood app, which is popular among young investors, in the first three months of the year, up from 1.7 million the previous quarter. Coinbase reported 6.1 million active retail users in the first quarter of 2019, which is more than double what it was in the last three months of 2020.
The atmosphere only got crazier from there. Dogecoin, a cryptocurrency inspired by an internet meme featuring a shiba inu dog, shot up to an all-time high of nearly 74 cents last month. This attracted even more speculative investors, some of whom increased their bets on spinoffs with no practical use, dubbed “shitcoins” by the crypto community.
New traders “didn’t want to miss out” after reading success stories online or hearing them from friends, according to Lisa Kramer, a finance professor at the University of Toronto who studies investor behavior.
Then there was a big bang. Tesla CEO Elon Musk, whose cheerleading fueled the rise of dogecoin, tweeted that Tesla will stop accepting bitcoin payments due to concerns about the environmental impact of mining them, and the market imploded. The ensuing sell-off wiped more than $410 billion from bitcoin’s market value and nearly $25 billion from dogecoin’s.
Some crypto believers, on the other hand, are adamant. During the recent sell-off, small investors in bitcoin — those holding between $37 and $37,000 — increased their holdings from nearly 4.8 percent to more than 5 percent of total supply, “suggesting increased interest as prices [declined],” according to data from researcher Glassnode.
The faithful have been encouraging each other to “buy the dip” so they can lock in future gains on the internet message board Reddit. Dogecoin, which fell as low as $0.22 during the recent sell-off, climbed back above $0.40 this week after Coinbase announced the launch of trading for users of its Pro service, though its price remains highly volatile.
According to Kramer, the “disposition effect” is a term used in academia to explain this phenomenon. According to research, investors are more sensitive to portfolio losses than gains, and they tend to focus on the price at which they purchased an asset. That often serves as a roadblock to offloading poor investments.
“This tendency to hold on to the poorly performing securities can end up continuing to cost the investor,” Kramer said. “Investors often make decisions based on gut instinct, but that can really lead them astray.”