After tremendous growth in the previous year, many cryptocurrencies are starting with a thud, giving back a significant chunk of gains from the end of 2021. Bitcoin has been running with the bulls for much of 2021, including a 23% rise from October to December 2021. But the ride seems to have taken a detour, following a 40% plunge in late January. However, things are starting to look up this February.
Cryptocurrencies are highly volatile, and their crashes have happened before. Though the factors driving each crypto crash are different, some of the same investing principles may still apply.
Could You Lose all Your assets in case of a Crypto crash?
When you invest in stocks, bonds or mutual funds, you have legal protections to help you recover your losses if the market crashes. Unfortunately, when it comes to digital assets like Bitcoin and Ethereum, there’s no such thing as a safety net.
The cryptocurrency markets have been extremely volatile over the past few months. For instance, the price of Bitcoin recently dipped below $33,000 — a level it hasn’t seen since last November — and many people are wondering how far it could fall.
You can only wait for the storm to pass. There really is no other option. Sure, on the algo affiliate website, you could pull your money out of Bitcoin and put it in a “safer” asset, but then you’d be trading one risky asset for another. If you sold at today’s depressed prices and then bought back in when the price went up (as it almost certainly will), you would lock in your losses.
The Risks in Buying Crypto
There are several major risks associated with buying cryptocurrency, including:
- Regulation risk; Cryptocurrencies, like bitcoins, are not yet regulated. While the Securities and Exchange Commission (SEC) has begun to crack down on fraudulent initial coin offerings (ICOs), it’s still relatively easy to scam investors in the space by creating a fake ICO or fake wallet service.
- Security risk; Since cryptocurrency transactions aren’t centrally monitored and are irreversible, hence, susceptible to theft. Hackers have stolen hundreds of millions of dollars worth of bitcoin by targeting exchanges, wallets and other users.
- Financial crime risk; Cryptocurrency exchanges have been used to facilitate money laundering and other criminal activities. The U.S. Department of Justice is investigating whether price manipulation is occurring at some exchanges.
- Volatility risk: Cryptocurrencies can be extremely volatile — often losing 20% or more of their value in a single day — which makes them an unsuitable investment for short-term needs.
Why Does Crypto Crash?
Crypto crash causes may include; inflation, fluctuating interest rates and other macro-economic factors. According to data from CoinMarketCap, the current value of all cryptocurrencies is $2.6 trillion. That’s almost the market capitalization of Apple and Tesla, two major companies with huge revenue streams.
The reason for that high valuation is that many crypto investors believe it will keep rising. But there are a lot of cautionary tales about people who bought bitcoin when it was relatively unknown and then lost a lot of money when its value dropped or disappeared altogether. Some have even been scammed into purchasing fake cryptocurrencies.
Parting Shot
The price of Bitcoin (and other cryptocurrencies) is highly volatile, so it is not recommended to invest money that you can’t afford to lose. However, if you are looking for a way to diversify your portfolio and have some fun, then investing in Bitcoin could be a good choice for you.
