After a successful bullish market last year, the prices of major cryptocurrencies like Bitcoin and Ethereum have been plummeting this year, leaving people wondering about their crypto investments. In this article, we’ll explain why is crypto crashing and what you can do to survive in this crypto winter.
Crypto has been the talk of the town over the last few years. The market has seen some fluctuating trends, with one of the worst crashes in 2017 and the first-born cryptocurrency Bitcoin reaching an all-time high in 2021. The era that started with Bitcoin more than a decade ago has shifted the financial structure of the entire world, with the exception of a few countries, and is now heading towards a worldwide crypto regulation.
Last year proved to be a heavenly time for crypto space. With Bitcoin reaching an all-time high, the crypto market was booming significantly. There was an immense increase in the number of crypto projects and startups. Many new technologies like Decentralized Finance (Defi), Decentralized Applications (DApps), Metaverses, and many more have also surfaced.
However, when crypto enthusiasts were just hyped up for more bullish trends with the start of the new year, 2022 proved to be not-so-economical for the crypto market. On top of that, the Bitcoin stock crash resulted in the collapse of the entire crypto market.
While crypto is known for its volatility, the immense downfall still leaves a lot of question marks on the credibility of the new and emerging financial trend. Investors have lost millions of money and lots of assets with this downward trend. They wonder what could have possibly gone wrong. Is this just another crash in the volatile crypto market, or is it the beginning of the end of the digital asset class?
This article will answer every question related to why is crypto crashing and what you need to do if you have or are planning to invest in the crypto market, exploring everything from the very beginning.
What is crypto?
If you are new to the world of crypto, you might want to know what it is before moving on to reading the reasons for its downfall. Crypto can represent cryptocurrencies, crypto assets, or, in general, the overall crypto market. The first ever cryptocurrency is Bitcoin, which was created in 2009 by someone named Satoshi Nakamoto whose whereabouts still remain a history. No one could ever trace him. This tells us so much about the anonymity that cryptocurrencies offer which will be discussed later on.
Cryptocurrency is a digital currency based on blockchain technology and is used over the internet. The transactions are done through a validation method called cryptography, through the use of a decentralized system. Unlike regular currency, cryptocurrency doesn’t have a central issuing or regulatory authority like banks, rather it is based on a decentralized work system. So basically, cryptocurrencies don’t rely on banks for their processing.
Cryptocurrencies make sure that you don’t have to worry about the hassle of carrying around physical money. You can send and receive payments purely as digital entries that are stored in a safe and decentralized online database. Another fascinating thing about cryptocurrency is that all the transaction records and data are stored on a transparent public ledger visible to all currency holders. This makes cryptocurrencies more reliable and secure than physical money since the records of the latter are not public to everyone.
While the records are transparent, cryptocurrency gives you the benefit of anonymity. Crypto programmers or project owners can choose to stay anonymous and not reveal their identities. This has nothing to do with the transparency of records, they still remain visible.
Since cryptocurrencies operate digitally and have no physical presence, it is clear that they cannot be stored in physical wallets. Cryptocurrencies are stored in digital wallets that involve advanced coding to verify, store and transfer cryptocurrencies from one place to another, ensuring complete safety and security.
Just like there are a large number of physical currencies like the Dollar, Euro, Rupee, etc., there are a lot of cryptocurrencies as well with Bitcoin, Ethereum, Ripple, Litecoin, etc. being some of the most prominent examples.
Becoming a trillion-dollar industry
When the concept of cryptocurrency came into being more than a decade ago, it had to face a lot of criticism from financial experts. For many years, cryptocurrencies were considered just a bubble or a fad. In the beginning, most people were not even aware of this new type of digital currency. And the rest were not fully educated. However, it didn’t take long for people to notice the potential of cryptocurrency and the benefits associated with it.
Cryptocurrency is not just a currency, it comes with a pack of amazingly new concepts based on the biggest trend of the century, blockchain. That’s why cryptocurrencies quickly became famous. The digital currency then went on to become a big industry, with lots of trading platforms, exchange projects along with a number of job opportunities as well. The first Bitcoin futures on a regulated exchange were listed in December 2017 by the Chicago Board Options Exchange. The trend was followed by the Chicago Mercantile Exchange in January 2020.
The evident boom in the crypto sector came during the pandemic era. When COVID-19 hit, most of the world came under strict lockdowns which resulted in many people losing their jobs and staying at home. This gave the world ample time to explore cryptocurrencies. With everything, from jobs to businesses, shifting to online and virtual modes, the concept of virtual currencies quickly grew into the trend.
The year 2021 proved to be the most blissful one for cryptocurrencies, maybe because the people were more educated about the concept and were more interested in it. Whatever the reason, this was the year when cryptocurrencies became mainstream. The first Bitcoin Exchange Traded Fund (ETF) was launched in October of that year. The platform provided investors with exposure to Bitcoin without having to buy it on a crypto exchange.
The very next month, in November 2021, Bitcoin hit an all-time high of more than US $68,000 and the overall value of the crypto market was near $3 trillion. El Salvador became the first country to accept Bitcoin as the legal tender and big giants like Facebook, Amazon and Google adopted the use of cryptocurrencies throughout their infrastructure. The traditional financial sector was becoming increasingly accepting of cryptocurrencies as a legitimate asset class.
The number of crypto enthusiasts had grown, leading to an even greater number of investments in the billion-dollar sector. The world was progressively moving towards crypto regulation and governments started considering the use of cryptocurrencies for a transparent work structure. However, the coming year i.e. 2022 did not prove to be so fortunate. Down below is the story of the downfall towards a bearish crypto market.
The start of the crypto winter
Normally, a bear market is defined by some specific benchmarks that include stocks dipping by 20% from their highest value. However, when the downfall remains constant and the prices remain low for an extended period of time, this is identified by financial experts as the crypto winter. And right now, the weather is exceptionally cold in the crypto market. It’s a time when one must remain vigilant and be prepared for chaos to sweep over the market without much warning.
At the beginning of the downfall, experts and investors thought it to be just another volatile crash resulting in a bearish market for a limited period of time. But the consistent nemesis is telling yet another story. The key bellwether of the crypto market, Bitcoin is trading at almost US $20,000 which is more than half of its all-time high. But it’s not just Bitcoin stock crashing, many other cryptos have also fallen. The fall of stablecoin Terra was also a big blow for the industry since it severed the credibility of fiat-pegged cryptos.
People are beginning to wonder if it is the beginning of the end predicted by the anti-crypto ones. Some have even started to believe the myths of crypto being just a bubble. The crash is also followed by layoffs at some of the major crypto exchanges like Gemini. One of the biggest exchanges, Coinbase, has recently announced a hiring freeze and stated that it would be counting its headcount, although no layoffs have been reported yet.
The immense downfall has been characterized by extreme fear, with recent global economic turmoil adding to incidents such as the meltdown of the Terra blockchain ecosystem and its TerraUSD stablecoin and LUNA tokens.
Why is crypto crashing?
This is one of the most sought-after questions following the prolonged crypto winter. People wonder what happened to the biggest financial revolution driver that had yet to overcome the boundaries of worldwide regulation. Crypto enthusiasts are wondering why is crypto crashing, that too at a time when the world is becoming increasingly accepting of cryptocurrencies as a legitimate asset class and is moving towards a progressive crypto regulation.
Although cryptocurrencies are known for their volatility and market shifts, such a huge turnover was not expected at all. There have been many bearish markets in the history of crypto but the present one seems to have extended over a longer period of time. Experts have mixed opinions on this crash. Some say crypto was just a bubble from the very start and this is how the bubble has burst. However, others remain optimistic about the digital currency’s fate.
The crypto experts are busy explaining the possible crash reasons to investors worried about their investments. Although the crypto world has been disconnected from the traditional stock market for a very long time, the recent inflation tells yet another story. During the past few months, inflation has soared higher than ever, interest rates have pumped up, and living costs are biting.
Stock markets have thus gone into turmoil, with US S&P 500 now 20% down from its recent high. In such situations, even the big investors like hedge-fund owners or corporate people stay away from new investments, let alone small investors who find cryptocurrencies volatile, unpredictable, and too great a risk in such times. Moreover, people who have already invested in crypto are selling out their stocks and pulling out of crypto investments before it goes down further.
With more people selling out, Bitcoin’s worth starts declining. Since Bitcoin is the bellwether of cryptocurrencies, the fate of the entire crypto space rests on it, as is evident from the recent Bitcoin stock crash. From its all-time high of almost US $70k, Bitcoin’s price has fallen almost 70% to date and the first-born crypto is now trading around US $20k. The value of the crypto market is directly pegged to its desirability. The lesser the value, the lesser the investments. This results in a continuous downward cycle. People start selling when they see the value going down and this goes on, resulting in a prolonged bearish market.
Although some stablecoins have fiat currencies pegged to them, most of the cryptocurrencies have no intrinsic value, unlike traditional assets. There’s nothing like bricks or mortar, the price is the only thing that makes a digital currency valuable. And when people start losing interest in it, nothing can stop crypto from drowning the very next moment.
Moreover, the world’s lingering fight with the COVID-19 pandemic and the uncertainty going around the governments worldwide has also to do with Bitcoin’s huge price fluctuations. With crypto down to a large margin, the current market cap stands at almost $1 trillion market cap, which is more than a 70% downfall from last year’s $3 trillion cap.
Crash of the Terra ecosystem
The Terra ecosystem has been the talk of the town since it fell almost 99.9% in value, barely surviving from being wiped out completely. The victim token fell prey to the black swan event that happened on May 11, 12 and within 48 hours, the TerraUSD (UST) crypto token crashed from $120 to $0.02. The crash then continued further to finally make the token reach $0.00000112. Its twin token LUNA, which was supposed to stabilize UST, also fell to a few cents.
Both TerraUSD (UST) and Terra (LUNA) were created in 2018 by Terraform Labs in Seoul, South Korea. The UST was created as a stablecoin pegged to the dollar with a 1:1 ratio. LUNA was created to stabilize UST in case of any imbalance in the peg ratio. And all this stablecoin algorithm worked until it didn’t. The Terra Labs CEO, Do Kwon, however, gave no statement on the crash which was considered just another ponzi scheme.
The immense fall of the Terra ecosystem not just placed a huge question mark on the stability of stablecoins but also questions the constancy of the entire crypto market. The crash was followed by a downward trend in many other cryptos, extending the crypto winter even further.
Not the ultimate end
One important thing to understand here is that this crypto winter is not the ultimate end. Crypto winters are marked by dreadful volatility, market crashes, and prolonged bearish sentiment, during which the crypto prices continue to decline for months and sometimes, even for years. Such consistent price decline ultimately results in the loss of value as well. However, this doesn’t mean that the asset’s price and value may never recover at all.
For more understanding, let us take you back to the first crypto winter that ran from early 2018 to mid-2020 marked one of the worst Bitcoin stock crashes, during which Bitcoin lost almost 87% of its value as compared to its all-time high at that time. However, the world witnessed how the very next year proved to be the best one for the crypto world, with Bitcoin setting up a new all-time high and becoming a legal tender in El-Salvador.
According to experts, crypto winters are usually followed by a strong bullish season, making new highlights and marking new milestones in the crypto sector. That’s why crypto winters aren’t eternal at all. And the fear that they will last forever is nothing but simply a fear. So, experts suggest that crypto enthusiasts stay tight for the ride and do not lose hope. And there are a number of ways to do that, to not lose hope.
What to do to survive the crypto winter?
While some may think of such times as the end of the world, there are a number of ways to not just survive but also benefit from a bear market since it’s a great time to add some valuable crypto to your portfolio, that too for a small amount.
When investors observe price drops in Bitcoin and other cryptos, the first thing they do is sell certain assets fearing further price reductions. Even though this panic-selling might seem to be the only suitable decision at that time, investors might miss the possible long-term outlook. In order to avoid such confusing instincts, it is best to keep a plan that will successfully help you to overcome the bearish times before the situation gets the better of you.
Beware of your risk appetite
The most important rule of thumb for trading is to never put in the capital that you cannot afford to lose. It is of utmost significance to beware of your risk appetite before investing your hard-earned money into an asset as volatile as crypto.
If you have invested most or all of your life savings into the crypto market, the bearish times will certainly make you panic. That’s why it is wise to only invest the amount that you can bear to lose. In other words, if the capital you are going to invest in crypto could cripple you if lost, it isn’t worth investing.
Risk is also associated with the certain crypto you are investing in. Some cryptocurrencies might be hurt badly during crypto winters, others not that much. So, it’s better to always assess and compare the risk factors of various cryptos in order to avoid burning a hole in the pocket.
Diversify your portfolio
What better time to diversify your portfolio than a bear market. High prices and bullish markets make it almost impossible to diversify and enrich your portfolio with all kinds of cryptos. However, bear markets provide a chance to do just that. A diversified portfolio comes with a lot of benefits, with the most significant one being able to survive volatility.
A crypto market crash often comes with good investment opportunities for investors. If you have been wanting to buy or trade certain crypto but couldn’t do so because of its high trading price, you can trade it during a bear market when its price falls down and becomes reasonable for you to buy.
Dollar-Cost Averaging (DCA)
Dollar-cost averaging or DCA refers to the long-term planning where small portions of an asset are accumulated over a period of time regardless of the price. DCA strategy is one of the best strategies and is proven to have worked extremely well during the steepest crypto market falls.
An example will help you understand more clearly. If you invest $50 in Bitcoin weekly rather than investing $200 at one time, you are making use of the DCA strategy to invest in bits instead of investing a big amount at once. You can make changes in the schedule from time to time according to requirement changes. DCA is a simple but long-term strategy that strangely helps the investors to average down their costs
One thing to keep in mind here is that the focus of the DCA strategy should be on reliable assets and projects that have active development, engaged communities, and a roadmap that lays out how the project will continue to grow. For example, the DCA strategy would work well on Bitcoin which is the biggest crypto but wouldn’t work so well on a crypto project that has a fraudulent history.
When things get tough in a crypto crash and your portfolio starts losing value, staking is a good way to not just save that but also to earn passive income from your crypto stash. Staking refers to the process where you lock away your coins on a Proof-of-Stake (PoS) blockchain and are rewarded for it. When your coins are locked or staked, you cannot use them for any other purpose. This way, you also don’t have to worry about the daily price fluctuations.
Staking also saves you from panic-selling because your fund is securely locked in a safe place and unstaking your tokens before the staking period results in the loss of profit so you can’t do that as well.
So the good thing about staking is that you get to earn passive income even during a crypto market crash. And when the market stabilizes, you can start with more than what you had previously.
Although it’s a decade old, crypto is a relatively new asset as compared to traditional assets like gold and equities. But the relative potential that comes with this new asset class is huge. And it is highly probable that it’s going to shift the traditional finance market in a significantly positive way.
Crypto winters can be devastating and there are times when it seems that the sun may never shine again. However, history is evident that bull markets follow bear markets just as the summer and spring seasons follow the winter season. Just like the first crypto winter of 2018 that was followed by an extremely bullish market in 2021, the crypto space is sure to overcome this winter as well.
This article explains the possible reasons why is crypto crashing and what possible measures you can take to avoid loss in such bearish markets. Keeping in mind the above-mentioned pointers, you can also earn a passive income during such bearish times.