Cryptocurrencies have indeed proven resilient in the COVID-19 era, garnering strong interest from institutional and retail investors as well as US conglomerates. However, the recent pullback in cryptocurrencies has sparked a debate on whether the market is on the verge of a 2018-like crypto crash or there is some steam left in this asset class.
Towards the end of May 2021, Bitcoin and other major cryptocurrencies experienced a sharp fall in the price of nearly 50%, which wiped out a mind-boggling US$1.3 trillion of market value. The white-knuckle ride in cryptocurrencies emerged as a shock for latest investors who have not seen such a crash over the past 12 months.
The recent retreat in cryptocurrencies was primarily sparked by the US automaker Tesla, which reversed its March decision to accept Bitcoin as payment for its electric vehicles, flagging environmental concerns. While Bitcoin enthusiasts were hoping for wider adoption of digital currency after Tesla’s pro-bitcoin stance, the recent U-turn dashed their hopes, triggering a fall in cryptos.
At the same time, a regulatory clampdown initiated by China, which reiterated its warning to crackdown on cryptocurrency mining as part of an effort to control financial risks, stimulated the crypto sell-off.
Speculations are rife that Tesla’s decision may give other firms the jitters about facilitating payments via cryptocurrencies. Besides, fears loom that China’s hardline stance can prompt other regulators to limit the decentralised power of cryptos, as already evident in the US Treasury Department’s plans for tougher regulation on large crypto transfers.
Cryptocurrency Crash: End or Just Another Beginning?
Turning attention to Bitcoin, the beloved crypto asset lately lost more than half of its value since reaching the all-time high in April 2021. The recent turnaround in Bitcoin price baffled many crypto enthusiasts who were eyeing its widespread institutional adoption.
Other digital coins like Ethereum also followed suit, crashing as much as over 60 per cent from its all-time highs set in April. While Ethereum was seen to be successfully navigating crypto market oscillations mostly in 2021, the digital currency was unable to sustain momentum in the recent market correction. However, the digital currency is still standing at a year-to-date gain of over 250 per cent, better than Bitcoin with a year-to-date gain of just over 20 per cent.
While the latest dip in crypto prices appears dramatic, it appears normal in volatile markets like crypto space, which usually occur with short-term traders taking profits. Besides, the recent pullback seems to be a healthy correction after a power-packed rally seen in 2021, which may see several crypto enthusiasts tapping on the ‘buy-the-dip’ opportunity.
Furthermore, the digital currencies still appear to be trading at a great value and the early investors are certainly not at a loss. If the mainstream adoption of cryptocurrencies continues to accelerate, we may see these digital coins regaining some lost ground in the near future.
What do Cryptocurrency Enthusiasts Need to Know?
Undoubtedly, cryptocurrencies hold enormous potential to create millionaires in a jiffy. However, one should not neglect the heightened risk levels and luck factor driving such fortunes. Thus, market observers who are new to the cryptocurrency space should ponder on investing only if they are also prepared to lose their money.
With cryptocurrencies being highly volatile, knowledge of technical analysis seems imperative for investors to manage the positions with respect to changes in the trend, momentum and volatility. One needs to be aware of the mechanism of the crypto market, which is unregulated and has absolutely no intervention by the government or any regulatory authority.
Investors can also utilise hedging techniques to protect themselves during highly uncertain periods as cryptocurrency trading has no circuit breakers to prevent an erratic move.
It is equally important to have a proper risk management plan in place before taking any position on leverage in cryptocurrencies. Investors can lessen the risk in this volatile space by keeping crypto exposure at a low proportion of their portfolio and avoiding unrealistic price growth expectations.
The recent crash in cryptocurrencies has surely given a lesson to investors on how boom and bust phases can shift within a matter of hours in the crypto space. Thus, it is imperative for investors to approach the crypto market with caution while investing in tokens that are more likely to survive over the long run. Furthermore, investors should only invest the money they can afford to lose in this volatile market without ending up in financial trouble.
Kunal Sawhney is the founder and CEO of Kalkine. An accomplished financial professional, he has extensive expertise in equity markets and adopts quantitative and qualitative stock selection practices.