Often, market observers and participants wonder why crypto prices take steep downturns, sometimes erasing billions of dollars in value within a short span. In these turbulent times, the question “Why is crypto crashing?” arises frequently. The causes are multifaceted, often rooted in a complex interplay of factors, including regulatory news, market sentiment, economic shifts, and more. This article delves into the myriad reasons behind why crypto is crashing today and gives insights about what you can expect from the future.
Possible reasons for the crypto crash
Cryptocurrency is a well-known concept even to those who are not investors. With the price of cryptocurrencies potentially recovering from their recent drop, some are wondering if it’s worth investing in now. Does the crypto market have the capability to withstand the crash and come out stronger in the end?
The recent crash in the crypto market was due to various factors such as record-high inflation, rising interest rates, fear, a lack of confidence, and recent events. According to analysts, most of these factors are “macro” which means they pertain to the overall economy instead of any weaknesses specific to the crypto market.
Coinbase, the well-known platform for trading and tracking, reported a loss of $430 million in the first quarter of 2022 which led to an 81% decrease in its stock value. The company disclosed in June 2022 that it would be laying off 20% of its employees. Despite this, some analysts are confident in the company’s ability to recover, citing its resilience during past downturns in the cryptocurrency market.
As predicted by John Todaro, a crypto-asset researcher for Needham & Co., in a CBS News interview in July 2022, Coinbase has managed to survive well into 2023 despite the worsening winter conditions for crypto.
The recent downturn in the cryptocurrency market was not an isolated event. In fact, both the Dow Jones Industrial Average and the S&P 500 entered bear markets in mid-June and early July 2022, respectively. A bear market is defined as a 20% or greater decline from a recent peak that persists for a significant period of time. The impact of the crypto crash was widely felt within the industry and extended beyond individual investor losses.
Is the crypto market on the rise?
Bitcoin’s performance can serve as an indicator for the entire cryptocurrency market. This is because altcoins like Ethereum often follow the same trends as Bitcoin.
As per Coinbase, Bitcoin was more than 75% lower than its peak value of $68,789.63 in November 2022. As of April 2023, it remained low by over 55% from its all-time high. Consequently, Bitcoin has been in a bear market since mid-2022.
Is it a good time to buy crypto?
The current low prices of crypto present a potentially good opportunity for buying. Bitcoin experienced a 30% increase in March 2023, and supporters of crypto are remaining optimistic. Ethereum, according to Coinbase, has also seen a rise of more than 70% since January 2023. However, its price has not yet fully bounced back from the losses suffered in 2023 and still remains below its all-time high of $4,800 in late 2019.
Will crypto prices recover in 2023?
In its brief existence, cryptocurrency has endured numerous crashes. GOBankingRates has recorded at least seven significant Bitcoin crashes, followed by recoveries, dating back to 2011 when Bitcoin plummeted 99% in value. The term “crypto winter” originated from these crashes.
According to The Guardian, investors may need to wait for the market to improve as winter comes before spring. The recent crash and potential recession may cause some investors to feel apprehensive about investing in crypto.
The stock market is around for a long time, and has gone through its ups and downs since the late 1790s when the first U.S. stock exchanges were established. However, crypto lacks this extensive history to draw upon, according to the Library of Congress. This knowledge of the stock market’s varied performance over time provides a sense of reassurance for crypto investors.
Although the cryptocurrency market is showing signs of improvement, it remains highly volatile and may experience sudden price drops caused by various incidents and factors mentioned earlier. Coping with a crypto crash like this can be difficult, but there are several strategies that can be employed.
Don’t Panic and Stay Informed
It is important to stay calm and avoid making quick decisions. Staying informed about the latest developments that could impact the crypto market is crucial. Joining online forums, communities, and news portals can provide valuable information.
Diversify Your Portfolio
To minimize the risk during a crypto market crash, traders should use diversification as a strategy. They can invest in multiple cryptocurrencies or asset classes so that if one investment suffers losses, the others may balance them out. This will help reduce the overall risk of their portfolio.
Clear Exit Strategy
Traders should establish a clear exit strategy before a market downturn to prevent making impulsive decisions. This can be done by setting up stop-loss orders or taking profits at predetermined price levels. By following clear guidelines, traders can avoid allowing emotions to influence their trading decisions.
Buying the Dip
When there’s a crypto crash, frightened investors tend to sell off their holdings which causes a drop in prices. Nonetheless, this situation can be an advantageous time to purchase high-quality cryptocurrencies at a reduced price for those who have long-term investment strategies. Though “buying the dip” can be a risky approach, it can succeed if traders perform thorough research.
Holding for the Long-Term
One should keep in mind that cryptocurrency markets are highly volatile and price drops are a common occurrence. It’s advisable for traders and investors to hold on to a project that shows long-term potential and exercise patience. This is a key factor for succeeding in cryptocurrency investments.
Dollar-Cost Averaging
Dollar-cost averaging is a technique where traders invest a fixed amount of money at regular intervals, regardless of the market conditions. This method can help minimize the impact of market fluctuations and lower the risk for investors. By investing a fixed amount on a regular basis, traders can purchase more cryptocurrency when the price is low and less cryptocurrency when the price is high.
Using Automation
No matter what investment strategy you are using, it’s important to prioritize limiting potential losses. Luckily, there are automation software and advanced trading bots readily available, allowing traders to set up price-targeted trades with ease. Automating trading is crucial for minimizing risk, especially with the market operating 24/7.
Conclusion
The factors that lead to cryptocurrency crashes are as diverse as they are intertwined, mirroring the multifaceted nature of the crypto market itself. While the frequency of these downturns can paint a picture of instability, it’s essential to view them as part of the inherent volatility that characterizes this still-maturing market. Understanding the driving forces behind these crashes not only equips investors to better navigate market lows but also sheds light on the growing pains of this innovative financial space. As the crypto market continues to evolve, so too will its dynamics, potentially offering greater stability in the years to come.
