The Cryptocurrency – Tech Market Cycle (And When to Invest in It)

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Investment products in the tech market can be one of the most valuable picks for an investor. Tech stocks, funds and cryptocurrencies all have the potential to offer major returns, especially in the long run. However, the fast movement of the industry means that boom and bust cycles can come quickly — taking the unprepared investor by surprise in some cases.

This is how the tech market tends to cycle, and how you can know when it’s time to invest.

Tech Stocks and Startups

The tech market in general is one of the best-performing sectors, both historically and of late, with the Dow Jones U.S. Technology Index offering 1-year returns of 51.42% in October 2020, compared to the DJIA’s 1-year returns of just 4.93%.

As with other industries, there is a variety of investment products and funds that you can use to invest in the sector at large or individual niches.

Tech ETFs, for example, range from broad exposure funds to ones that deal only in particular niches or technologies, like blockchain ETFs that invest in just those companies developing new blockchain applications.

Startups in the tech sector, along with companies specializing in experimental or cutting-edge technology, aren’t guaranteed successes, but they can provide big wins for the right investor. Often, some of the biggest gains in price will come during the early days, as hype builds behind a new application or piece of technology. These gains are usually followed by a drop-off period as the challenges to making the idea workable become clear. As the idea proves successful, there will typically be a significant rally, leading to a point of stable prices. If the idea doesn’t work out, you’ll see the opposite.

You can see this pattern in the stock price history of Amazon — which had multiple periods of rising and falling prices before company stocks really took off in the early to mid 2010s.

In general, betting on the industry overall will be a safer bet, but it may net an investor lower returns than they would have seen had they invested in niches or specific companies. Cutting-edge tech — like AI and non-crypto applications of blockchain — can sometimes offer significant returns. Companies that deal in essential industry hardware — especially semiconductor manufacturers — also tend to do well in the long run.

Big tech companies — Microsoft, Alphabet, Apple, Amazon et al — are also generally a good bet. Investors are likely to see the biggest wins if they are able to invest ahead of big product announcements of successful launches.

The tech industry is large and diverse, and knowledge of one area — like specific types of hardware, semiconductors or software — may not carry over to other sectors. Familiarity with the IT life cycle, for example, can help investors identify when IT providers may be ahead of the curve or lagging behind the competition. However, an in-depth understanding of that life cycle may not help an investor with another niche, like graphics cards or processors.

The Crypto Market

In general, cryptocurrencies — like Bitcoin and Ethereum — are volatile. Values can rise and drop suddenly, and it’s not uncommon for prices to surge or crash with little notice, unlike other, more stable investments. Bitcoin, for example, hit an all-time high of $20,000 in 2017, crashed to less than $5,000 in March 2020 and is currently hovering around $13,000 now, in October 2020. 

Knowledge of how crypto works can help investors predict some price fluctuations — for example, the $20,000 BTC high came at the peak of a major rally following a bitcoin “halving” in 2017. 

However, the market isn’t insulated from the rest of the world, and not all market cycles are guaranteed to repeat in the same fashion. The drop to $4,000 was likely due to uncertainty in the early days of the COVID-19 pandemic, rather than anything specific to crypto. The 2020 bitcoin halving has had no major effect on the currency’s value, so far despite the significant impact of the 2017 halving — leading analysts to suspect a 2021 bull run, though nothing is guaranteed.

For investors wanting to put money in crypto the complexities of custody may also create difficulties. Profits made on cryptocurrencies need to be treated as capital gains — and taxed accordingly — unless you mined the coins yourself. Selling bitcoin can also be a unique challenge.

It is possible to invest in the crypto market without directly holding the coins yourself. Investment products, like the Grayscale Bitcoin Trust (GBTC), invest directly in the Bitcoin market.

How and When to Invest in the Tech Sector

The tech market cycle looks a lot like the cycles you’ll see in the broader stock market. However, the tech industry does tend to move quickly, meaning that investors may have less time to react to new developments. For those investing in bitcoin and other cryptocurrencies — markets known for their volatility — this may be an even bigger challenge.

Certain practices — like staying on top of tech news, investing before hype cycles and after a product seems to have proven itself or just investing in the industry, rather than specific companies — can help.

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