The all-time highs of cryptocurrency in 2021 now seem like a distant memory, as the 2022 crypto crash has seen significant digital assets give back the gains made during their historic bull run.
So, what is causing the crypto crash? It is crucial to understand that crypto assets are not on their own in this new cycle. The stock market has also fallen as officials in the United States seek to contain inflation by limiting the money supply and raising interest rates.
Even though bitcoin prices are down in 2022, they are not at their lowest in recent months. Following all-time highs last year, both bitcoin and ether experienced steep drops in July 2021. This may not provide much consolation to investors who purchased these coins earlier this year, given their bitcoin values have declined year to date.
However, as investors have migrated away from riskier assets, Bitcoin has taken a beating. Furthermore, the decline in cryptocurrency valuations is placing pressure on banks and other major players that made investments near the market’s peak.
Investing in cryptocurrency has never been for the faint of heart. Digital assets are extremely volatile, and similar fluctuations have already occurred. Though the causes of each crypto collapse are distinct, it can be useful to recall a few well-known financial concepts.
What could cause a crypto market crash?
Being aware of and prepared for the likelihood of a crash, regardless of asset type, is a natural aspect of learning about investing money. Cryptocurrencies are included. Various factors can cause crypto to crash.
Lack of liquidity
The ability to find buyers for all of the sellers in a market is referred to as liquidity. A high-liquidity market is one in which traders can quickly redeem an asset for cash. A lack of liquidity in the crypto market could result in a crash. Sellers may attempt to find purchasers for their digital assets by lowering their asking prices, which may create a chain reaction.
Because they have the two most excellent cryptocurrency market capitalization, bitcoin and ether are unlikely to face liquidity concerns. They are also the two most commonly traded coins among cryptocurrency investors. Less popular cryptocurrencies, on the other hand, may have price spikes followed by severe drops.
Cryptocurrency acceptance is lagging.
In some situations, the lag in cryptocurrency adoption may contribute to a crypto crash. According to the Pew Research Center, only 16% of Americans have invested in, traded, or used cryptocurrencies.
Early adopters and crypto aficionados may believe cryptocurrencies have a bright future. This might drive up cryptocurrency values as hopes rise for increased acceptance of cryptocurrencies as assets and even for everyday use.
Sanctions or international crypto bans
Cryptocurrency bans impede uptake and frequently result in price drops. Furthermore, a huge country like China wields enormous power over global acceptance and use.
Furthermore, several governments provide de facto bans by imposing restrictions on how financial institutions interact with bitcoin transactions through their central banks.
On the other hand, sanctions may have an unpredictable impact on bitcoin prices. Russian President Vladimir Putin authorized his forces to invade Ukraine on February 24. In response, the United States and the European Union levied a slew of political and financial sanctions on Russia.
Concerns over the war quickly impacted the mood in the crypto market, driving bitcoin and ether values to near-all-time lows this year.
What To Do If Cryptocurrency Prices Come Down
Do Not Worry
Whether you decide to sell your cryptocurrencies or use a drop as an opportunity to buy more, you must remain calm. Making emotional decisions, especially while trading, rarely yields positive results. So, before you panic and enter the market, evaluate why you’re trading bitcoin in the first place.
Keep in mind that volatility is the name of the game.
Cryptocurrency is inherently volatile. Because cryptocurrency does not create cash flow, traders must rely on mood changes to move the price. As a result, the market can fluctuate between extreme optimism and pessimism.
When you have an asset that is driven by sentiment, traders’ emotions influence the market. That is also true for stocks, but they may have a real stream of expanding cash flows from their issuing firm to propel them higher.
This volatility is exactly what attracts professional traders, who use high-powered algorithms to make sophisticated trades that most traders do not have access to. Traders enjoy volatility because it allows them to profit from the game.
A diverse portfolio is vital for avoiding over-reliance on a single asset or asset class. Include a diverse range of assets in your portfolio, including equities, bonds, cryptocurrencies, and commodities. Other assets, such as real estate or non-fungible tokens, could be added to your portfolio depending on your portfolio goals and risk tolerance.
You might diversify your bitcoin holdings in addition to diversifying across asset classes. Consider adding a range of coins by browsing for promising cryptocurrencies. This gives you more options in the event of a cryptocurrency crash.