Cryptocurrencies have already plummeted, so it’s a good idea to stick to certain tried-and-true investment rules.
Cryptocurrencies have had a rough spring, with drawdowns in May bringing assets like Bitcoin down more than 50% from their all-time highs in 2021. The losses were more severe on May 9, when the greatest cryptocurrency fall in recent memory occurred.
So, why is crypto-currency collapsing? Several variables might have had a role in the recent drop. As US officials limit the monetary supply, investors have been turning away from riskier assets such as cryptocurrency. As a result, crypto prices have fallen, placing pressure on institutions and other significant participants in the industry who made investments around the market’s peak.
Investing in cryptocurrency has never been easy. Digital assets are very volatile, and similar swings have already occurred. Though the causes of each crypto meltdown are unique, it’s useful to recall a few tried-and-true investment ideas.
In 2021, Kiana Danial, author of “Cryptocurrency Investing For Dummies,” remarked, “It is extremely intriguing because every time Bitcoin goes up, it obtains all the attention, people become thrilled.” However, according to Danial, the last person to purchase while the price is at its highest “is the one who will panic when the price ultimately declines.”
FUD, or dread, uncertainty, and doubt, is a term used to characterize the propagation of negative attitude in crypto circles. Though these emotions might help you see warning signals, it’s also crucial to maintain a level head and consider if short-term instability will have an impact on your long-term ambitions.
So, what do you do when digital assets, such as Bitcoin, plummet in value? Here are some frequent questions and their answers to assist you in navigating the issue.
What is causing the crypto market to crash?
Interest rates, inflation, and other macroeconomic variables might influence how confident individuals are about putting their money in hazardous alternative assets, affecting crypto’s price movements. Savings accounts become more appealing when interest rates rise, and some individuals may feel more comfortable placing their money where they can earn predictable returns.
And when prices drop abruptly, as they did in May 2022, it may add to market pressure by compelling some investors to free up funds to pay other commitments.
Government activities by authorities throughout the globe are another reason that might create investor pessimism and perhaps lead to a crypto crisis.
As public interest in cryptocurrencies has surged, governments are considering the implications of the technology for monetary policy, security, and the environment.
The crypto market has been preparing for action from the US government on numerous fronts, and the drawdowns in 2022 come at a time when the market is prepared for action. The Biden administration has directed federal agencies to establish specific plans for crypto supervision as monetary officials hike interest rates in a bid to control inflation.
These developments serve as a warning that bitcoin is still a relatively young technology with unknown long-term consequences for the global economy. Cryptocurrency values are fickle, and unexpected occurrences might cause them to plummet.
Is there a history of cryptocurrency crashes?
Dramatic profits and losses are nothing new to people who have been trading in cryptocurrency for years. Bitcoin, for example, reached a prior high of over $20,000 in December 2017, but was trading around $3,500 by December 2018.
“The ups and downs may be stunning” as Bitcoin becomes more widely used. “Taking the long view puts these swings in perspective,” said Greg King, the founder and CEO of Osprey Funds, a digital asset investing business.
Some earlier price reductions have been welcomed by seasoned investors. “Then you’d perceive the reduction in Bitcoin’s value as a chance to buy,” Danial said.
What are the dangers of investing in cryptocurrency?
Someone who has been watching crypto from the outside may believe that now is the moment to go in and “buy cheap.” However, King suggests that you ask yourself two questions before investing in Bitcoin or other cryptocurrencies.
“Think about if an 80% to 90% drop in your crypto holdings would make you lose sleep at night or make you sell,” he added. “If any of those questions is yes, don’t invest.”
“Ask yourself how much money you can afford to lose,” she said, “since each investment has risk.” “If you choose your assets correctly and have solid reasons for investing in them, you shouldn’t be persuaded by market downturns and will stay the course.”
What role does cryptocurrency play in your portfolio?
When it comes to investing in crypto, experts advise against going “all in.” Jake Yocom-Piatt, co-founder of the cryptocurrency Decred, advises against purchasing big sums of cryptocurrencies all at once. “It’s psychologically tough for consumers to purchase a huge amount at once and the price decreases.”
Instead, he recommends using an approach similar to that used in financial markets: dollar-cost averaging. “Buy a tiny bit every month and then simply keep doing it as the price goes up or down, rather than purchasing it all at once and having to deal with it mentally for the foreseeable future.”