No matter if you aren’t invested in the crypto market, you will undoubtedly have noticed some turmoil in the industry in recent months.
Cryptocurrency is highly volatile and has a colorful track record of going through “boom and bust” cycles. This high volatility has left many people wondering whether or not it is safe to invest.
With cryptocurrency experiencing record highs, and then devastating lows, it’s no wonder that people are concerned about any investments currently tied up in cryptocurrency.
Many investors are left simply wondering what impact, if any, recent market crashes will have on the future of cryptocurrency. Like so many things, crypto appears to have gone through a gradual period of uncertainty and then unraveled all at once.
With that in mind, let’s take a look at whether the recent market crashes could impact the future of cryptocurrency.
Why has the crypto market crashed?
There are many reasons why the crypto market has experienced some volatility. Given that there have been many external factors that have affected global stock markets, such as the war in Ukraine, higher interest rates, and the fear of inflation across the globe.
These global factors have then, unsurprisingly, spilt over into the crypto market.
Bitcoin, one of the original cryptocurrencies, is responsible for around a third of the overall crypto market and is one of the currencies rocked most frequently by instabilities in the market.
In June 2022, a major US cryptocurrency lending company called Celsius Network froze transfers and withdrawals, citing “extreme trading conditions” as the reasoning. This then instigated a slump across other cryptocurrencies, causing their value to drop below $1trillion for the first time since January 2021.
As well as this, there has been a sudden and severe amount of traders selling off major cryptocurrencies. This has, in turn, triggered panic and further sell-offs, with confidence being hugely affected.
Why is Bitcoin so volatile?
Unlike more traditional investments, such as stocks, where costs can be influenced by business performance, Bitcoin and cryptocurrencies have no underlying assets. This means that its price is based purely on speculation. This means that it can cause huge swings in the price of Bitcoin in a short space of time. There are also several global incidents that have caused the price of Bitcoin to fall:
- US lending company, Celsius Network, freezing withdrawals, and transfers as a result of extreme conditions.
- Binance, one of the world’s biggest cryptocurrency exchanges, paused Bitcoin withdrawals.
- Early in 2022, Russia reported it might ban cryptocurrency operations. After the invasion of Ukraine, crypto platforms then wanted to ban Russian transactions.
- In June 2021, banks in China were told to stop enabling crypto transactions, with the government banning cryptocurrency mining. In September 2021, all crypto transactions in China were declared illegal.
- In August 2021, a crypto hacker stole around $600m in a cyber attack only for them to return half of it days later so as to show the vulnerabilities in the system.
With these incidents causing the Bitcoin market to crash, investors are fast losing confidence in the cryptocurrency sector. When prices rise quickly and surge to record highs, this then means that a crash is more likely.
This appears to be the situation currently surrounding Bitcoin. As a result, this means that traders are less likely to invest their money into Bitcoin, and whilst it’s possible that Bitcoin could gather momentum again in the future, it’s unlikely to be at the same level again. This puts the future of Bitcoin into question.
Will cryptocurrencies survive?
If you take cryptocurrency out of the picture, then the increase in speculation that a market crash is imminent holds some credibility. In June, inflation rates across the globe were higher than expected. With countries putting more money into post-covid relief and supporting the Ukraine invasion, this is inflating markets, but this will, inevitably, stop at some point. This means that rumors of a crash may be justified and is likely an inevitable consequence of the downturn in crypto markets.
What to do if crypto markets crash
With the crypto market so volatile at the moment, it’s important that, if you are a crypto investor, you prepare for a potential market crash. Preparation means that you can avoid losing large quantities of money and means you can act with a cold head.
Should the crypto market crash, then you need to act and remain calm. Making emotional decisions in a time of uncertainty, especially when trading, very rarely results in a positive outcome.
Assess any loss or damage to your stocks or investments and then look into the forecasts for the markets.
Ask yourself if you’re in the crypto market as a long-term opportunity or whether you’re just looking to make a quick return on investment. The answer will determine which direction you take the trade-in.
Keep an eye out for scammers
As soon as crypto markets crash or decrease, scammers know that there will be many people in vulnerable positions, and will likely prey on these traders by acting as legitimate brokers, offering to make trades on their behalf as they have insight into the market.
Usually, scammers prey on the most inexperienced traders, so if you are new to the trading market, avoid falling for broker scams as you will lose your money.
Remember that crypto is volatile
Cryptocurrency is volatile by nature and, as it generates no cash flow, some traders rely on changes in the market to drive up the price. This means that the market can swing aggressively from one extreme to the other.
When a market is driven by sentiment, the emotions of traders seem to propel the market. This is true in the stock market, too, but this volatility attracts professional traders, who use powerful algorithms and programs to make sophisticated trading decisions.
Traders like the appeal of volatile markets, as it is often what makes them money, so remembering this, especially if you are a new or inexperienced trader, can help you keep a level head.
Author: Natalie Wilson