Over the past few months, the cryptocurrency appears to have endured a protracted crash — or at least a correction — with the market cap of all crypto assets falling from around $3 trillion in November 2021 to around $986 billion in September 2022. Aside from a brief rally in July, crypto has been falling since the beginning of the year.
Some crypto lenders, including US-based Celsius Network, resorted to freezing withdrawals as investors panicked over the precipitous crash of stablecoin TerraUSD and its sister coin Luna in May. Meanwhile, Coinbase, the largest crypto exchange in the US, confirmed plans to lay off almost 18% of its workforce, with the company admitting it had been growing too fast (they also cited inflationary pressures and the prospect of a global recession).
Given the old investment adage “buy the dip,” investors might be looking for a slice of the volatile crypto market now, hoping that this represents a temporary downturn rather than a long-term bear market or an extended crypto winter.
If you think now is the time to buy, here’s a look at past trends, some expert opinion, and buying tips if you’re new to cryptocurrency.
Significant losses
In late June, bitcoin (BTC) fell 30 percent in a week to around $21,000, at least improving on the drop to $18,000 a few weeks earlier. To put that in perspective, Bitcoin was trading as high as $69,000 in November 2021. Between June and September, BTC continued to hover around the $20,000 mark and on September 5, a single bitcoin was worth $19,934.64.
In July, Ethereum (ETC) traded at $1080, down more than 70% from previous highs. A drop of more than 50% means significant losses. As of September, it had recovered somewhat, trading at $1579, but still well below the $4500 of its peak last November. Ethereum has been more volatile than usual with news of failures in its anticipated network upgrade, commonly referred to as a merge.
It is these types of fluctuations that have prompted the Australian Securities and Investments Commission (ASIC) and the federal government, via their website Moneysmart, to warn crypto investors. Moneysmart says there are no guarantees of returns and that people should tread carefully (and beware of scams) when investing in such a volatile market.
Inflation, downturn and war
The co-founder of automated crypto trading platform Coinrule, Oleg Giberstein, believes that crypto is facing the same stresses as other parts of the economy, causing its price to drop.
He said, “It’s not just crypto that’s down, everything is down and the economic outlook for the next six to 12 months is grim. With slow economic growth and high inflation, central banks are caught between rock and rock. So investors are escaping risky assets like crypto and tech stocks.”
Whether this downturn marks the start of a long-term trend or a temporary dip, Giberstein believes the market could remain challenging for up to two years, but additional things could get worse during that time.
Crypto exchange Luno’s Sam Kopelman agreed that the misfortune of Bitcoin and other coins did not happen in isolation: “The market is grappling with the fallout from rapidly rising US interest rates, alongside military conflicts in Europe.”
Is Buy the Dip a Good Strategy?
The buy the dip principle is based on the assumption that price declines are temporary deviations that correct themselves over time. Dip buyers hope to take advantage of dips by buying at a relative discount and reaping the rewards when prices rise again.
Crypto markets are volatile, so buying cryptocurrencies at any cost — let alone a dip that could become a long-term trend — is risky. While prices could return to previous levels, they could also fall further and flood your investment.
If history is the prologue, then the current slump (or slump, depending on your perspective) could be a rebound like last year when prices fell to similar levels before reviving to pre-slump levels and spring even reached their peak. But of course they couldn’t.
Oleg Giberstein said: “Some novice investors have been burned trying to ‘catch falling knives'”.
He advises those who commit to buying the dip to decide on a set amount of money they want to buy BTC or ETH with each month and not worry too much about what happens to prices in the next happened two years ago.
Pavel Matveev of digital exchange Wirex advises buyers to hedge their bets. He said, “It’s important to diversify your crypto portfolios with different altcoins to mitigate risk.”
https://www.afr.com/technology/what-caused-crypto-to-crash-this-time-in-five-charts-and-will-it-survive-20220711-p5b0ps
How to buy cryptocurrency
If you’re new to cryptocurrency and looking to invest, we’ve put together a guide to walk you through the process, including choosing a platform, the fees involved, and alternatives to buying coins outright. Read our guide to buying cryptocurrencies here.
This article is not an endorsement of any particular cryptocurrency, broker, or exchange, nor is it a recommendation of cryptocurrency as an asset class.
Related: How to buy cryptocurrency in 3 steps
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frequently asked Questions
How come crypto crashes?
There are a variety of reasons why the cryptocurrency has been on a (mostly) downtrend since early 2022, not the least of which is the broader global economic outlook. Rising interest rates, the specter of a recession in the US and Europe, inflationary pressures and of course the war in Ukraine are all factors. Bitcoin, for example, fell below $20,000 this week after the US Federal Reserve committed to raising interest rates to curb inflation. Investors selling their cryptos in response to the falls are also contributing to the falling market caps, as well as a number of reported events including raids, alerts, scams and withdrawal freezes. But crypto falls are nothing new, and altcoins have historically lost 70% of their value (or more). This is not to suggest that investors shouldn’t worry, but to highlight the inherent turmoil of the cryptocurrency.
Is Crypto Still Crashing?
It’s very hard to speculate about the future of cryptocurrency or suggest a likely path. Its cycles can be long and steadily declining over many months, or short and lose tremendous value in a matter of days. So far this year, crypto has not recovered since its November 2021 highs. One thing is for sure, the crypto sector increasingly appears to be reflecting broader market nervousness and this will likely be reflected in its future volatility.
Which cryptocurrency has fallen the most?
A number of coins, in fact the majority of cryptocurrencies, have fallen more than 90% from their all-time highs. This is why so many financial regulators are concerned about crypto, as huge declines are nothing new and are in fact a hallmark of the asset class. Take the leading coin Bitcoin (BTC) as an example. In June, Bitcoin’s value plummeted to $17,592 from nearly $69,000 in November. This is a story repeated over and over for most coins, where steep declines (and sometimes rebounds) are the order of the day.
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