'Never invest money that you can't afford to lose.'
the golden rule of investing
Intro
It's not a big surprise that cryptocurrency is a highly volatile thing. It's swinging all the time and depends on many different issues starting from historical events to Elon Musk's tweets. But joking aside, the crypto market experienced another drastic fall, and that's quite difficult to find the answer to why that has happened as there could be lots of twists and turns, but we've tried our best and are ready to share our hunches with you.
What exactly has happened to crypto?
The 'headliner' cryptocurrency Bitcoin ($BTC) fell on Wednesday, dropping to about $30,000 at one point for a pullback of more than 30% and continuing a week of selling in the crypto space. Ether ($ETH), the main Ethereum blockchain coin, was also dramatically down and broke below $2,000 at one point, a more than 40% drop in less than 24 hours. It whipped out about $100 billion from the combined crypto market in minutes and called into question the crypto market once again.
Other top cryptocurrencies such as XRP, luna, solana, cardano, and avalanche are also struggling with market sentiment decreasing to the floor price not seen since January.
Bitcoin and the crypto crash have caused a dramatic fall in market sentiment, as the Bitcoin Fear and Green Index, which collects data from social media posts, surveys, volatility, and trading volume, showed. Stock markets have also experienced this drop. The Nasdaq was reporting its longest weekly losing streak since 2012. According to The Washington Post, The Nasdaq continued to have the losses as investors are leaving high-flying tech stocks, shedding 3.3% in morning trading on Monday.
Bitcoin crashes of the past
For people who aren't newbies in the field and who have been investing in cryptocurrencies for years, big gains and losses aren't new. Let's have a look at some price swings of the past. Bitcoin's record ceiling price was $20,000 in December 2017, but by December 2018 was trading below $3,500. What a gap!
Bitcoin is looking for adoption, which means ups and downs are literary inevitable. Some high experienced investors and traders can even find some perks in the situation and go to the market with a desire to buy crypto while it's low.
Reasons why crypto has crashed
The increased market volatility can be caused by a wide range of events: rising inflation, geopolitical crises, or a stricter monetary policy by the Federal Reserve.
Experts claim that the crypto market has been increasingly tracking the stock market lately, which, combined with more mainstream adoption and the slumping prices we've seen to start the year, makes it even more intertwined with macroeconomic factors, experts say. Ethereum has traced the same pattern.
There is no such thing as a single cause for a fall of crypto. It's always a combination of this and that. Some causes were the low quality of the coin, a negative Musk comment, China's restrictions on crypto, the COVID-19 issue, U.S. government regulatory actions, Biden's recent executive order, etc. This mixture of factors has the potential to make sell-offs quite massive.
Another thing to take into account is that the de-pegging of Terra's UST stablecoin also threw some gasoline on that flame and added pressure on Bitcoin and the cryptocurrency market. Once the stablecoin lost its U.S. dollar peg, UST developers were "forced" to sell their Bitcoin, Ether, and other currencies.
Some experts recall the stock market crash of 1987, from which the markets took months to recover. But crypto moves way faster today than equities did in the 1980s, so the market may see a quicker recovery.
Stay or go from the market?
Swinging prices are not a surprise for those investors who use a buy-and-hold strategy. They, of course, expect such events. According to a financial expert, Humphrey Yang, there is nothing to be worried about when experiencing so-called market dips*. That's a part of a game, 'malum necessarium' if you want.
In general, experts advise keeping your cryptocurrency investments to under 5% of your portfolio and don't be stressed about swings.
The main principle here is no panicking. It's better to reconsider your investment strategies, have a closer look at your portfolio and make sure it's diverse enough.
Yang also recommends stopping checking on your portfolio every single time and don't let your emotions get too much into it, or you might sell at the wrong time or make the wrong decision.
*A dip-buying an asset after it has dropped in value.