The Crypto Tumbleweed

Aman saw one of his neighbours reaping a lot of dividends from the financial market investments, while a few of his friends were bleeding in the stock market. He was confused and perplexed. He did what most of his other peers and the internet search guided him to: CRYPTOCURRENCY

As per him as well as the peer group, keeping money in banks was not safe, with a few reputed too going bust in the recent past, other instruments although stable, took too long to reap benefits (3-5 years). With the quick-fix generation looking at immediate benefits, it was indeed a big concern (pun intended).

After soaring to dizzying levels, cryptocurrencies have lost more than half of their value in the recent months. The recent collapses and the scatter in the crypto market has taken many by shock. Investors are experiencing the deep chill of the current crypto slump, almost half-a-decade after the market’s mainstay, Bitcoin, marked the first digital freeze by tumbling from its then peak. The recent fall has been sharp and spectacular, an overall market that was estimated to be worth more than $3 Trillion barely six months ago is now worth less than $1 Trillion. This “crypto crash” has reinforced the perception of critics that markets for the digital currency - used primarily as an investment vehicle as it is not widely accepted as payment for goods and services - are little more than global casinos operating with virtually no rules or accountability.

The emergence of the latest crypto boom had all the characteristics of being another example of the "Robinhood Economy". Bored white collar workers, confined to their homes due to the pandemic lockdowns but plentiful disposable income, turned to day trading as a way to pass the time. Cryptocurrencies also benefited from the surge in day trading. Bitcoin had an year-on-year growth of 1100% between 2020 and 2021. Even in the latest boom, another crypto, Ethereum saw a phenomenal growth of ~4100% in 2021.

The flood of money washing into the world of crypto did more than simply inflate the monetary value for the incumbent shareholders. It instead led to a surge of interest in, and funding for, the vast array of projects that aimed to capitalise on the underlying technology of cryptocurrencies. For a generation of new investors, the “decentralised finance” opportunities of the sector were appealing. Built on top of the “programmable money”, the “DeFi” [decentralised finance] sector was an attempt to expand cryptocurrency's anti-establishment ethos to cover the global economy. 

The crypto crisis has played out against the backdrop of wider market problems like rising inflation and higher borrowing costs that have stalked investors. Some market watchers play down the prospect of a crypto crash triggering serious problems elsewhere in the financial markets or the global economy but digital assets have been hit by some of the same economic issues that have affected the wider global economy and stock markets. Cryptocurrencies have been affected by concerns over rising inflation and the ensuing increases in interest rates by central banks, which has made risky assets less attractive to investors. This meant that as stock markets declined, so too did crypto assets. 

So, What's Next? The principle of “buy the dip” is based on an assumption price drops are temporary aberrations that correct themselves over time. Dip buyers hope to exploit dips by buying at a relative discount and reaping the rewards when prices rise again. Crypto markets are volatile, so buying cryptocurrencies at any price – let alone a dip that might become a long-term trend – is risky. While prices could return to previous levels, they could also fall even further, leaving your investment underwater. On the other hand, cryptocurrencies prices have shown a degree of seasonality historically speaking. However, as with every kind of investment, let alone the unpredictable world of cryptocurrencies, past performance is no guarantee of future results. It is advisable to buyers to hedge their bets. It is important to diversify your crypto portfolios with different altcoins to mitigate risks.