Bitcoin’s price surpassed $19,000, while Ethereum dropped below $1,000 (2022 June 15). This extended the crypto bear market to new lows. Bitcoin fell nearly 10% in 24 hours. This is on top of a string of losses that have been sustained over the past months. Bitcoin is now at $20,000, more than 70% below its November 2020 high of $68,000 per coin. Since that peak, Bitcoin’s value was lost $900 billion.
The so-called crypto winter is also affecting on Ethereum. The second-largest cryptocurrency token fell 10% to $975 on Saturday, marking its lowest level since January 2021. From its record-breaking November high, the coin has lost 80%. The huge crypto meltdown is part of a larger market downturn caused by rising inflation, rising interest rates, and war in Ukraine.
The Federal Reserve raised interest rates by 75 basis points this week. It’s the largest increase since 1994. This led to an abrupt retreat from all assets. The S&P 500 is also going through a bear market and had the worst week indicators since 2020. The $60 billion collapse of Terra-Luna and Celsius tokens, two major crypto currencies, is causing a lot of pain in the crypto world. These losses have raised doubts about digital currency’s stability.
Bitcoin price drop and rough start in 2022
Bitcoin had risen almost 70% in 2021. This is an incredible indicator for any asset. Don’t forget that it doesn’t have any tangible worth the full faith and credit of a nation’s economy behind it. Digital gold has shown a 70% annual return after gaining more than 300% in the lockdown-stricken 2020.
But as usual with risky assets, after a sharp rise, there is a sharp fall. Despite continued growth in 2021, bitcoin has failed this year, and this trend is likely to continue. Alex Reffett, the co-founder of East Paces Group’s wealth managing firm, says that investors will be more cautious in 2022. They will adopt a safer mode and “a general flight to safety across the board in most asset classes.” According to an expert, value-based investments look more attractive than speculative stocks, cryptocurrency and other high-risk investments.
As already mentioned, the politic of the Federal Reserve is one of the key factors for market earthquakes. The government is trying to fight inflation, which has been steadily rising in recent years. The Federal Reserve has increased interest rates three times in the past year, and it’s expected to increase them again in July. The Fed is experiencing an unprecedented rise in inflation that rivals anything in the last four decades. Analysts believe that the central bank will keep raising rates through the year, and possibly beyond 2023. Some estimates indicate that the fed funds rates could end the year at 3.5% or higher.
As you understand such changes actively attract investors and reduce demand for growth companies, such as tech stocks, and speculative risk assets like cryptocurrencies. It’s difficult to predict how much crypto demand will continue as liquidity dries up.
Steve Sosnick is Interactive Brokers’ chief strategist officer. He stated that there has never been a precedent for how Bitcoin and other cryptos would behave if the central bank start to actively withdraw liquid activity. These are challenging times for investors, and riskier assets give place to safer options.
How should crypto investors react to such a situation?
To be able to invest in crypto for long-term purposes, you should expect price swings. Big drops don’t need to concern you if your investing rules are followed states Humphrey Yang, a personal finances expert behind Humphrey Talks. Yang mentions that he has also been through 2017’s “crypto crash”, in which many major cryptocurrencies lost significant value. “I know these things can be volatile. They can go down as much as 80% in a few days.”
So it was and so it will be therefore as a rule experts recommend that cryptocurrency investments shouldn’t exceed 5% of your overall portfolio. Token Metrics, chief technical analyst Bill Noble, said: “If you do this, then don’t stress about the swings. They’ll keep happening because they are old as the hills and it’s not moving anywhere. It’s something you have to deal with.”
If you separate too many shares in your crypto investments, this type of extreme drop could be a problem. Here is the same case as with bitcoin casinos, you should only put in as much money as you can afford to lose. Don’t panic if the crypto market drops. It might be worth reevaluating what you feel more comfortable with going forward. You might consider putting less crypto into the future or diversifying through crypto-related stocks and blockchain funds, instead of buying crypto directly. You should be aware that volatility is a normal part of cryptocurrency markets.
Frequently Asked Questions
There are three key factors:
- rising inflation;
- rising interest rates;
- war in Ukraine.