If you’ve been looking at your crypto portfolio recently and despaired at all the little red arrows and red percentages, you may be wondering just what the hell is going on in the crypto world to tank the value of all your coins.
Even if you’re just someone who dabbles in some of the more major coins, you’ll have felt the pinch since virtually all cryptocurrencies have taken a serious hit over the last few months.
Trading volumes on the US’s largest crypto exchange, Coinbase, are down 44% in the first quarter of this year. The market capitalisation of all crypto assets has fallen by $2.2 trillion since the peak in November of last year, dropping by about 52%. Bitcoin has dropped from a high of US$70,000 to around US$30,000. Analysts are proclaiming that “crypto winter” is here.
Just why this is happening, how long the dip is going to go on for, and what exactly can be done to protect investments are the questions on every crypto-enthusiasts lips. Here, The Latch has put those questions to some of the experts in Australia and they’ve dished on just what is happening, and what we might expect in the near future.
Why is Crypto Crashing?
Uncertainty, cost of living spikes, and interest rate hikes seem to be the main drivers of the crypto downturn. The selling off of investments considered to be risky — and crypto is as risky as they come — began in November 2021 as inflation rates in the US spiked.
Crypto has, at times, been seen as an asset not bound by the impacts of global financial fluctuations, and a relatively independent class of investments. However, as institutional interest grows, and the big banks get in on the action, that is likely to become less and less true. The latest dips, in correlation with overall financial market volatility, show that crypto is losing that independence.
“At the moment we’re seeing surging inflation and oil prices, lockdowns in China, continued supply chain issues and the war in Ukraine. So it stands to reason that the markets, as well as crypto, would be impacted,” Tegan Jones, crypto expert at Finder told The Latch.
“With crypto, the biggest fear is always going to be a big fall in value, which is what we’ve seen recently. Between May 6th and 8th, we saw Bitcoin’s value dip by a staggering 17%.
“Traditional investments are also taking a hit. The S&P 500, Dow Jones and the NASDAQ were all down dramatically this week. In fact, the S&P 500 was down 16% from the start of the year when the markets closed on Monday U.S. time.
“This is not particularly surprising as investors tend to act more conservatively during times of uncertainty.”
Josh Gilbert, the Australian Market Analyst at eToro sees it similarly:
“Bitcoin has fallen by around 55% from its all-time high of USD$69,000 in November 2021. However, if we compare this with the correction we’ve seen from the Nasdaq as a broader example, it’s only fallen by around 26%,” Gilbert told The Latch.
“If we dive into individual tech stocks such as Netflix, Zoom, PayPal, Atlassian and Docusign, these names have all tumbled around 60% or more.
“Bitcoin’s rising correlation with other asset classes is climbing. In that sense, bitcoin is the victim of its own success, with more institutions getting involved. This has meant that we’re seeing bitcoin trade in line with tech stocks and feeling the full effect of the uncertain macro environment”.
Lee Daniels, analyst at Coinspot, also views the current crash in a global context:
“The current drop is being speculated to be driven by a variety of factors. This includes the US financial system combating a high inflation environment and raising interest rates while using a monetary policy known as quantitative tightening (QT)”.
What to Do About a Crypto Crash
Hopefully, you haven’t YOLO’d your life savings into a highly volatile asset. If you have, well, the best thing you can do is hold on for dear life and resist at all costs the temptation to sell. Selling, as with any asset, realises those losses, whereas continuing to hold will leave you with the possibility of a bounce back. How long that bounce back takes, though, is anyone’s guess, but crypto can take years to recover from big dips.
“Like with any investment, there are risks involved with cryptocurrencies, but with high risk can come high reward,” Jones said.
“Be sure to do your due diligence so you know what you’re getting into.
“The best thing to do with crypto is to consider it as a long-term investment and ignore the day-to-day volatility. Short-term volatility is just part of the cryptocurrency scene”.
“That doesn’t mean there is zero risk. There will absolutely be moments of stress for investors as the charts swing wildly — 2019 had a 71% drop in price, for instance”.
“Selling your crypto might be something you want to consider when it’s trending up, but generally not when it’s dropping”.
Gilbert argues that drops like these are par for the course, given the highly risky investment profile of crypto, and should be treated as expected.
“Setting clear investment goals and outlining your risk tolerance is critical. Using risk management tools such as stop losses can also help investors minimise losses if they have a certain sell or risk level,” he said.
“The average bitcoin correction is around 51%, so investors need to be aware of that volatility before jumping in. Although some seasoned investors would say this is all par for the course, given that these corrections have occurred previously.”
Daniels agrees that personal circumstances should be the most important factor here:
“As everyone’s circumstance is different, crypto holders will need to assess their personal financial goals and risk tolerance at this time,” he said.
Is Now The Time to Buy?
The sage advice of Warren Buffet is always worth repeating here; time in the market is more valuable than timing the market.
Essentially, you are never going to be able to guess when prices have bottomed out or hit their peak, so trying to buy and sell at these points is a bit of a loss — and stress — making exercise. Staying in the game long-term is a much safer and saner strategy.
“One way to lower risk when investing in cryptocurrency is through dollar-cost averaging,” Jones says.
“Many long-term investors use it for traditional stock investment. This is where you regularly invest a fixed sum into a cryptocurrency. For example, $100 at the start of every month or even $25 a week. Doing that means you can avoid some of the market’s volatility and short-term instability.”
“As always, people need to make sure they compare the fees involved with trading crypto as these can vary dramatically between providers”.
Gilbert stresses that “very few crypto assets” are immune to the current price swings, but buying in now should be carefully considered.
“Whether it’s the right time to invest entirely depends on an investor’s risk profile and personal strategy. However, in the past, some investors have seen the lower levels as a viable entry point, especially with bitcoin so far managing to trade above USD$30,000,” he said.
Daniels, however, suggests that there may be opportunities out there in the current market:
“As there are now a large number of cryptocurrencies available, on any given day some will go up even when others are going down. This fluctuation between coins can still be observed despite overall market sentiment”.
How Long Will This Dip Last?
Predicting the movements of crypto is a bit like reading tea leaves or trying to guess what the weather will be like in a year’s time — there might be people who claim to know, but no one actually has a crystal ball.
Given that crypto is now more directly tied to legacy financial institutions, broader economic trends are going to have more of an impact here. Basically, when the stock market settles down, we might expect crypto to do the same. Again, no crystal ball though.
“If you believe that all markets work in cycles, then the larger macroeconomic state of the world improving could increase the chance of the market to trend upwards,” Daniels said.
Gilbert agrees that “the macro environment must fundamentally improve, with less “bad” news.”
“Not only have many investors been shifting away from risk assets, the ‘good’ news, including the pending launch of three bitcoin spot ETFs in Australia and Fidelity offering bitcoin to retirement accounts in the US, has been overshadowed.”
“Nonetheless, if we see inflation start to ease and stabilise, we could potentially see a relief rally with inflation ‘peaking’ and the Federal Reserve’s tightening expectations fully priced in”.
Jones is bullish on the long-term prospects of crypto and believes it’s not worth writing them off as a loss or a dead end just yet.
“The long-term picture has looked different so far. Bitcoin, Ethereum and other digital currencies have seen incredible growth as use cases and demand grow. Experts predict cryptocurrencies will become increasingly prominent in global financial markets”.