Digital currency is extremely volatile, with a history of “boom and bust” cycles that have many investors wondering if it’s safe to invest. The most popular crypto asset, Bitcoin, has fallen below $18,000 for the first time since November 2020. It is the latest in a string of price drops in the crypto market, with Bitcoin alone losing more than 60% of its value in the last seven months at the time of this writing. Could the digital currency’s apparent downward trend be used to our advantage? We’ll take a look at that later.
What Is Happening?
Bitcoin is currently trading at $21,974 at the time of writing. It has dropped 25% in the last few days, the lowest value in the previous 18 months. Its November peak of nearly $70,000 feels like a lifetime ago. According to experts, this is due to the overall global climate, but things aren’t looking good just in the crypto world. An economic downturn lurks, inflation skyrockets, interest rates rise, and living expenses rise. Stock markets are also trembling, with the US investment market now in a bear market, which is down 20% from its recent high.
As a result, even the most wealthy investors are less free with their funds. And many regular investors – not wealthy mutual fund owners or corporations, but regular people like you and me – have less money to invest in anything. In these uncertain times, many people believe that investing in something as unstable and unpredictable as cryptocurrency is a risk too great. Because it is unregulated and unprotected by monetary regulators, if you invest in it with your savings and it loses value or you lose access to your crypto wallet, your money is gone.
Should You Consider The “Buying The Dip” Strategy?
The ‘buy the dip’ concept is predicated on the assumption that price drops are temporary occurrences that will correct themselves over time. Dip buyers hope to profit from price drops by purchasing at a discount and reaping the benefits when prices rise again. Because cryptocurrency markets are volatile, buying cryptos at any price – let alone a dip that could turn into a long-term trend – is risky. Prices may return to previous levels but may also fall further, leaving your investment underwater.
If history is any guide, the current dip (or crash, depending on your point of view) could recover similarly to last year, when prices fell to roughly the same level before going back to pre-dip levels and even peaking a few months later. They might not, of course. Cryptocurrency prices, in particular, have shown some seasonality to date, indicating to fall in value to varying degrees in the spring before rebounding in early summer. However, as with any investment, especially in the volatile world of cryptocurrencies, past performance is no guarantee of future results. Fortunately, if you sign up to a crypto platform like Bitcoin Up, you can be connected with one of their respected and reputable partner brokerage firms that offer all you need when considering the ‘buy the dip’ strategy.
A Substantial Loss
The price of Bitcoin has dropped by more than 20% to around $32,000 in the first week of June 2022. It traded for as much as $69,000 in November 2021, a drop of more than 50%, representing significant losses. ETH has experienced similar damages to Bitcoin over the previous month, dropping to around $2,400, while Cardano (ADA) has suffered, even more, collapsing by nearly 32% to $0.69USD.
While this does not yet match the magnitude of the 2018 crash, in which Bitcoin lost 80% of its value, experts warn that things could get worse for those who still hold BTC. These types of losses have compelled the Financial Conduct Authority (FCA) of the United Kingdom to issue numerous warnings to cryptocurrency investors. It states that there are no guarantees of returns and that investors should be prepared to lose their entire investment.
Final Thoughts
Will Bitcoin, or any other crypto asset, rise if the stock market falls? No, not always. Followers of virtual currency perceive it as a diversifier in balanced portfolios, but it didn’t do any better than stocks at the start of the recent pandemic. This is because investors panic-sold everything.
Furthermore, Bitcoin fell by more than 40% in the first two weeks of March 2020. Because of concerns about Covid-19, all equity markets took a violent leg down at the time. That said, how crypto assets behave during rapid falls in the market will rely on why financial markets have collapsed. Most bitcoin investors believe it would provide protection in the event of an inflationary shock, such as what occurred in 1974.