As the total crypto market cap dropped by $90 billion within 24 hours, the number of searches containing “Bitcoin dead” surged.
While experts are divided on what the plummeting of cryptocurrency means — a temporary setback or signs of a larger recession — it is clear that the increased volatility of the market offers many lessons for investors. Whether you’ve been hesitant to invest in crypto or are second-guessing your choice to do so, here’s how the crypto crash illustrates the risks of cryptocurrency investments and what you can do to manage those risks.
The crypto market isn’t a stranger to crashes. Bitcoin alone experienced a major crash in late 2018, followed by significant crashes during the COVID-19 pandemic. However, crypto’s tumble into its lowest levels since 2020 is evidence that holding onto your crypto assets can be a dangerous game in itself. Even Coinbase has laid off 18% of its workforce, and many investors are predicting a long-lasting crypto winter. We’ll explore some of the risks that the current state of the market has unearthed.
One of the core lessons that the crypto crash can teach investors is the fact that cryptocurrency isn’t a reliable investment at all. When you hold onto your crypto assets through a crash — or when you decide to take advantage of low costs to invest — there’s never a guarantee that your assets will bounce back. This is because cryptocurrency like Bitcoin has no intrinsic value.
To manage your risk, it’s important to avoid putting all (or even most) of your eggs in the crypto basket. Crypto should be treated as a gamble. Whether you sell or keep your crypto assets should be a question of how much you’re willing to risk, and perhaps what reward you’re waiting for before you cash out. If you’re looking to increase your profit to reach your long-term financial goals, maintaining safer investments, like high-yield savings accounts and index funds, is ideal.
If you’ve developed a professional network or gained followers due to your crypto usage, the current crypto crash may have been a blow to your reputation. For many old-school investors and others outside of the investment world, the crash is being viewed as evidence that crypto isn’t a legitimate investment.
One key to risk management for crypto investors is being willing to take ownership. When crypto falls more than you expected, be willing to admit your miscalculations. Continuing to promote crypto as a volatile market can damage your reputation further when the market fails to bounce back quickly.
The plunge in cryptocurrency value hasn’t deterred blockchain hackers from taking advantage of virtual vulnerabilities. As the market crashed, hackers made off with $100 million in cryptocurrency. Crypto and NFT thefts and fraud are continuing to rise.
Choosing a secure internet and a cold wallet is key to reducing risk when investing in crypto. Cold wallets aren’t connected to the internet — which limits your susceptibility to cyberattacks — and are protected by physical keys that you can store in a secure place. You can even store your assets in multiple wallets to get further protection.
However, it’s always important to keep potential insider threats, which cause over 30% of breaches, in mind. People close to you — and even those inside investment firms — are more easily able to hack crypto wallets and steal funds. Avoid having your entire investment portfolio on a public blockchain, which can make you a greater target for hackers. Ideally, crypto shouldn’t make up more than 5% of your portfolio.
Cryptocurrency is widely recognised as a threat to the environment due to the large amount of energy needed for mining. Unfortunately, the crypto crash doesn’t have much of a silver lining, as the amount of processing power used for mining isn’t declining. This is an important time for investors to consider the carbon footprint they’re leaving behind, as well as evaluate whether the environmental and financial costs of energy are worth the uncertain earnings.
Many crypto investors turn to stablecoins to avoid the volatility of the greater crypto market. Stablecoins, like Tether and Terra, are meant to maintain their value since they’re pegged to real assets, like gold or the U.S. dollar. However, TerraUSD crashed with the rest of the crypto market, leading to disastrous results for its sister token Luna.
Investors must recognise that there isn’t actually a safe way to enter the crypto market. Stablecoins don’t provide the stability they’re meant to, which means they can’t reduce your risk. As international governments discuss the possibility of regulating stablecoins, the future of stablecoins is largely unknown and, once again, a gamble.
While there isn’t an easy way to protect yourself from bad crypto investments, there are a few ways you can evaluate how reputable a cryptocurrency is. For instance, you can read up on the team behind the cryptocurrency — which should be disclosed and experienced — and read about their roadmap, so you can evaluate their potential for success. Taking a look at a cryptocurrency’s trading history, which should display steady growth, is also key to limiting your risk.
If you’re part of an investment firm — which is likely already taking steps to evaluate crypto — you can still take action to protect your business by keeping your organisation agile. In a volatile market, a firm that learns from failure and eliminates bottlenecks created by silos and hierarchies is best equipped to think on its feet when issues occur.
There’s no telling what’s in store for crypto in the future, so anyone involved in or considering investments must be wary of the market’s volatility and take steps to manage their own risk.
About the author: Adrian Johansen lives and thrives in the Pacific Northwest. She covers topics related to business and tech, especially when they intersect with sustainability and diversity issues. You can follow her on Twitter at @AdrianJohanse18.
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In May this year, a crash in crypto prices wiped out over $300 billion of value in one week, igniting fears that the runaway development of crypto could cause a global financial crisis.
That the crash was triggered by the implosion of a ‘stablecoin’, TerraUSD, caused particular concern. Stablecoins are so named because they are linked to low-risk assets, but TerraUSD’s peg to the US dollar was via another cryptocurrency, Luna – and when the market lost faith in Luna, it took down TerraUSD, along with the confidence of many crypto investors.
At the same time, in early June Japan became the first major economy to introduce formal regulation on stablecoins, legally defining them as digital currencies.
Or can it still become a catalyst for positive change if proper measures are implemented? There are strong calls on either side.
Last year, China banned all crypto transactions, citing crypto’s role in facilitating financial crime and the risk its speculative nature poses to the country’s financial system. In February, the deputy governor of India’s central bank T Rabi Sankar stated “banning cryptocurrency…is the most advisable choice for India.” Most recently, American billionaire businessman Charlie Munger, applauded China’s move to ban crypto, calling for the same to be done in the US.
The anonymity of cryptocurrency transactions allowed it to be used for money laundering and financing illegal activities, as well as in Ponzi schemes and other kinds of fraud. Earlier this year, US Senator Elizabeth Warren raised concerns that crypto could also be used by Russia to circumvent economic sanctions.
At the same time, crypto has the potential to bring in major benefits. Lower transaction costs can facilitate micropayments, while smart contracts reduce banking fees, revolutionising financial inclusion, especially in developing and emerging-market countries. “Globally, privileged, developed and free societies account for only 20% of the global population. Crypto provides an alternative economic system that enables greater financial empowerment and independence,” states policy analyst Evin Cheikosman. Others like Alpen Sheth of Mercy Corps Venture highlight crypto’s technological significance, for example how cryptocurrency networks “provide a new paradigm for secure data and value transmission”.
But whatever your position, considering a full ban on cryptocurrencies possible at this stage is wishful thinking. They are already an established feature of the global financial landscape. In 2021 alone, 16% of Americans and 10% of Europeans invested in crypto-assets, and the first Bitcoin exchange-traded fund was launched in the US. Even after the recent crash, the global cryptocurrency market is worth over $900 billion by some estimates. In other words, the genie is out of the bottle.
Or into jurisdictions where its negative uses would thrive.
Instead, there should be effective, global regulation implemented to take full advantage of the benefits of this emerging technology. And while cryptocurrency is on the frontier of innovation, looking at past mistakes can be instructive.
This is not the first time the global financial system has faced uncertainty and issues when faced with new asset types. Non-regulated Collateralised Debt Obligations (CDOs) which became notorious as a leading cause of the 2008 financial crisis are one example. Over-the-counter (OTC) derivatives, which are financial contracts that do not trade on an asset exchange, were another instrument found to play a role in the crash. In 2010, regulation of OTC derivatives was brought in with then European Commissioner for Internal Market and Services Michael Barnier stating, “no financial market can afford to remain a Wild West territory”.
But in the case of both OTC derivatives and CDOs, regulation came after the crash. This time around, regulators seem to be determined to put effective regulation in place before crypto can cause a global financial crisis.
Fabio Panetta, Member of the Executive Board of the European Central Bank, pointed out in April that the crypto market was larger than the $1.3 trillion sub-prime mortgage market which triggered the 2008 global financial crisis. “Now is the time to ensure that crypto-assets are only used within clear, regulated boundaries and for purposes that add value to society,” he said.
Major crypto market players also accept the inevitability of regulation and want to play a part in its development. Changpeng Zhao, CEO of Binance, the world’s largest exchange for trading Bitcoin and other cryptocurrencies, said recently that it is time for regulators and industry players to work together to develop effective, global, fit-for-purpose regulation.
The debate surrounding cryptocurrency is too often polarised between advocates and detractors. What is clear is that crypto brings in new possibilities but also familiar problems. The latest crash in the global crypto market should serve as a serious warning for governments, investors and the fintech sector to bring in comprehensive regulation. We must learn from past mistakes in order to realise cryptocurrency’s full potential and protect our financial system from a crisis.
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Speaking to Yahoo Finance, Belfort warned against taking a "12-month or 24-month horizon" when investing in Bitcoin, urging people to instead to view Bitcoin as a long-term hedge against inflation, which is currently at a 40-year high in the US.
"With reasonable luck, I think if you take a 24-month horizon you'll almost certainly make money,” Belfort said.
"If you take a three or maybe five-year horizon, I would be shocked if you didn't make money because the underlying fundamentals of Bitcoin are really strong.”
"It has a limited supply, and as inflation keeps rising there will come a time when Bitcoin will start to trade more like a store of value and less like a growth stock."
In recent months, Bitcoin has continued to drop, with Binance’s CEO Changpeng Zhao warning that the world’s largest cryptocurrency could remain below its $69k peak for two years.
Currently, Bitcoin stands at around $19,000, down over 10% in the last seven days.
Disclaimer: This article does not constitute financial advice. All investments are made at the reader’s own risk.
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Presently, crypto assets are largely unregulated throughout the world, with the national operators in the EU only expected to demonstrate controls for tackling money laundering.
This has led representatives from the European Parliament and EU states to iron out a deal on the markets in crypto assets (MiCA) law. This will likely come into effect around the end of 2023.
"Today, we put order in the Wild West of crypto assets and set clear rules for a harmonised market," commented lawmaker Stefan Berger. "The recent fall in the value of digital currencies shows us how highly risky and speculative they are and that it is fundamental to act.”
MiCA, as the first comprehensive system for crypto-assets in the world, will contain strong measures to prevent and fight market abuse and manipulation. Other major crypto centres, including the US and UK, are yet to give similar rules the green light.
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However, the crypto market is in a very nascent stage because it is only a decade old. New coins based on groundbreaking backend technologies are released every day. Still, new investors are drawn to this market because they want to earn some quick bucks. But the crypto market is still volatile, and most of the coins are seeking stability.
Governments have taken note of this rising trend and rolled out their own stable CBDCs. CBDCs work as fiat equivalent in the digital payment world and provide support to volatile tokens. If you are new to this market, here are a few things you should know before trading in cryptocurrencies.
Cryptocurrencies are digital assets that can be bought using government-backed currencies. Cryptocurrency in itself is not backed by governments. They are produced using a unique line of codes that cannot be copied.
Moreover, cryptocurrencies and tokens are decentralised, meaning they cannot be owned or controlled by a central authority. The record of every transaction is stored on a separate node distributed across the world.
Therefore, it is impossible to hack the entire system. You can use cryptocurrencies for trading and buying things online. Also, it is noteworthy that cryptocurrencies do not have a tangible profile. They are traded and managed online. Since each coin is backed by a unique code, it can be easily traced and tracked, which makes them safe and secure.
Blockchain is the technology that has facilitated the existence of cryptocurrencies. Blockchain provides the framework to carry out digital transactions without the need for a central authority. It is a system of digital ledgers that keeps the record of every transaction of every currency ever made.
Each block on the blockchain holds the information about a currency which is then distributed across the globe. Therefore, if a new transaction takes place, it is added to the existing ledger of information on all the nodes. This makes it impossible to hack the entire system. Blockchain technology is the primary reason why many have dubbed cryptocurrencies the future of digital payments.
Cryptocurrencies are not tangible, so you cannot withdraw them from ATMs or banks. Instead, cryptocurrencies are stored in encrypted wallets. The wallet access is provided by entering a super-secure password, without which one cannot access his/her currency. A private key gives access to the blockchain that stores currency information.
Cryptocurrencies are traded just like listed stocks. There are several platforms like Bitcoin Surge that provide the details of the listed currencies. You can buy or sell the currency just like the stocks. These forums provide a platform for trading and charge a minimal fee for every transaction. Using these platforms, you can even buy cryptocurrencies fractionally.
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Changpeng Zhao, founder and CEO of Binance, said investors would have been “very happy” four years ago had they known that Bitcoin was trading at $20,0000 in 2022. Zhao’s comment comes as Bitcoin dropped below that level at the weekend, wiping out the gains of many long-term Bitcoin holders.
Speaking to the Guardian, Zhao said, “I think given this price drop, from the all-time high of 68k to 20k now, it will probably take a while to get back. It probably will take a few months or a couple of years.”
“20k we think is very low today. But you know, in 2018, 2019, if you told people bitcoin will be 20k in 2022, they would be very happy. In 2018/19, bitcoin was $3,000, $6,000,” he added.
According to CoinDesk, Wednesday saw Bitcoin trading at $20,491 after reaching lows not seen since late 2020 at the weekend.
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Bitcoin is a cryptocurrency — a virtual or digital currency — designed to act as money and a form of payment. Bitcoin is beyond the control of any individual, group, or entity, which in turn removes the need for third-party involvement in financial transactions. It is rewarded to blockchain miners for their work to verify transactions and can be bought on several crypto exchanges.
Bitcoin was introduced to the public in 2009 by an anonymous developer under the pseudonym of Satoshi Nakamoto. While several people have claimed or were thought to be Nakamoto, their true identity remains a secret to this day.
Simply put, Bitcoin mining is the process of generating new Bitcoin by solving mathematical puzzles. The mining process consists of computing systems, known as Bitcoin miners, equipped with specialised chips competing to solve the puzzles, and the first Bitcoin miner to solve the puzzle is rewarded with a Bitcoin.
When Bitcoin was first launched, it was mined on desktop computers with regular central processing units. However, this proved extremely slow and Bitcoin is now generated using large mining pools.
Bitcoin mining pools are networks of distributed Bitcoin miners who work together to mine blocks. The payments are then distributed depending on each body’s contribution to the pool. Contribution is measured in terms of hash rate. This is a measure of the number of attempts to find a new block (hashes) performed per second. When a miner in the pool finds a block, they pay a block reward to the pool’s mining coordinator who takes a small fee and then pays each member of the pool based on their hash rate contribution. This system ensures a steady stream of income for small Bitcoin miners who have very low chances of finding a block single-handedly.
Yes, there are a number of ways you can convert Bitcoin to cash. These options include: selling Bitcoin on a cryptocurrency exchange, selling via a Bitcoin ATM, selling your Bitcoin in exchange for a prepaid debit card, or using a peer-to-peer platform to sell your Bitcoin for cash.
Bitcoin’s price is determined in the same way that the value of any fiat currency is determined: supply and demand. When demand for Bitcoin is up, its price increases. When demand for Bitcoin drops, so does its price. In the past, Bitcoin’s drops have been triggered by a number of different factors, including negative comments by Tesla CEO Elon Musk and crypto crackdowns in China.
In April of this year, the Central African Republic became the second country in the world to adopt Bitcoin as legal tender, following in the footsteps of El Salvador which made the move in June 2021. Presently, Bitcoin is only accepted as legal tender in the Central African Republic and El Salvador.
At the time of writing, Bitcoin is experiencing some serious lows. Most experts are putting Bitcoin’s crash down to the wider global climate. Recessions are looming, inflation is soaring, interest rates are up, and the cost of living crisis is pinching pockets. As such, many investors have less to invest, meaning demand for Bitcoin is quickly slipping.
Bitcoin is volatile firstly because its price is influenced by supply and demand. But, moreover, Bitcoin is volatile because, unlike fiat currencies, it lacks control by a central bank or government. This means no one can step in to support markets and artificially subdue volatility.
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Since the beginning of the year, Bitcoin has erased over half of its value, leading to increasing criticism for digital currencies, including from billionaire Microsoft co-founder Bill Gates.
Speaking at a TechCrunch talk on Tuesday, Gates described crypto and NFTs as “100% based on greater tool theory”, referring to the concept that overvalued assets will go up in price when there are enough willing investors. Gates joked that “expensive digital images of monkeys” would “improve the world immensely.”
NFTs are cryptographic assets on a blockchain with unique identification codes that set them apart from one another. Unlike crypto, they cannot be traded or exchanged at equivalency. NFTs are often touted as a means of proving ownership of digital assets, such as art. However, critics such as Gates view NFTs as overhyped and potentially damaging.
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"If you want to invest in these assets, okay, but be prepared to lose all your money," Bailey said to the public accounts committee (PAC) on Monday.
"People may still want to buy them because they have extrinsic value [...] people value things for personal reasons. But they don't have intrinsic value."
"This morning we have seen another blow-up in a crypto exchange," Bailey went on to say.
Bailey’s warning comes as Bitcoin and other cryptocurrencies continue to fall in price after crypto exchange Binance paused all withdrawals, citing “extreme market conditions.”
Bailey also told MPs on the PAC that artificial intelligence tools could potentially be used to create automatic control on cryptocurrencies that are deemed to be suspicious.
Bitcoin hit an 18-month low, falling as much as 17% in under 24 hours to £18,540. The world’s biggest cryptocurrency is now down more than 49% this year.
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The outlook for the crypto market looked bleak on Tuesday following a brief rally on Monday that sent Bitcoin above the $31,000 level for the first time in six days.
In the past 24 hours, the combined market cap of all crypto assets has dropped by $90 billion to just over $1.2 trillion. Bitcoin is now trading at approximately $29,500, down 5% in just one day.
However, analysts have recognised recent institutional investor interest in Bitcoin exchange-traded products as a sign of long-term strength in the crypto market.
"It's largely institutional, and to a degree retail investors, recognising that the pain is already endured, and we're closer to the bottom than we are to the top,” Chief investment officer of Arizona-based IDX Digital Assets, Ben McMillan, told Reuters.
"If you're getting into crypto at these levels, a little near-term volatility could be worth a long-term payoff.”
On Wednesday, Binance’s venture arm, Binance Labs, announced it has raised $500 million for its debut start-up fund, having secured backing from DST Global and Breyer Capital.
Binance Labs will use the capital to invest in companies creating Web3 — a tech movement that aims to build a new version of the internet based on blockchain technology.
“We are looking for projects with the potential to drive the growth of the Web3 ecosystem,” Ken Li, Binance Labs’ executive director of investments and M&A, told CNBC. These projects could include infrastructure, NFTs, and decentralised autonomous organisations.
The company’s announcement comes after US venture capital firm Andreessen Horowitz announced a huge $4.5 billion fund to invest in crypto start-ups last week.
Bitcoin and other cryptocurrencies have lately been down sharply. Since reaching an all-time high of approximately $69,000 in November 2021, Bitcoin has plunged more than 50%. However, Binance Labs is reportedly hoping to capitalise on crypto’s recent dip to support it on its Web3 mission.
At 1:47 am ET on Thursday, the price of Bitcoin was down 8.76% to $26,848.20, according to Coin Metrics. Meanwhile, Ethereum dropped over 13% to $1,832.33.
Crypto dropped alongside stocks after the Bureau of Labor Statistics reported consumer prices for April were up 8.3%. This figure came in somewhat higher than predictions by economists polled by Dow Jones and spooked investors. As such, many investors exited risk assets, including crypto.
“The concern now for crypto asset investors is when the slide will end,” said Simon Peters, a crypto market analyst at trading platform eToro.
“The market is caught in the wider adversity of investment markets that are battling to decide where comfortable levels are in the wake of interest rate hikes designed to quell soaring inflation around the Western world.”
This is the second occasion this week on which Bitcoin has tumbled into the $29,000 range. Analysts have called $30,000 a key level for the cryptocurrency by market cap.
