The cryptocurrency market is facing an intense crisis, which has been worrying investors and generating insecurity in the universe of digital currencies. Bitcoin, the most valuable cryptocurrency, for example, has lost more than half its value in seven months. To get an idea, in 2021 the value of bitcoin was trading close to USD 69 thousand, however, with the worsening of the crisis in recent months, the value of the asset fell by 70%, that is, it was worth about USD 20 thousand.
The moment, calledcrypto winter“, has gotten even worse in recent days, as major coins lost $1 trillion in market value. As a result, many platforms have laid off their employees, and due to the volatility of the digital currency, some investors are giving up on the apps.
But after all,what has pushed the cryptocurrency market into recession? According to administrator André Massaro, coordinator of the Group of Excellence in Financial Administration – GEAF, of the São Paulo Regional Administration Council – CRA-SP, one of the reasons is that the digital currency had a strong appreciation and all financial assets tend to return to their average prices. “As they say in the financial markets jargon, the price of bitcoin ‘stretched a lot’, around $69,000, and then fell sharply”, comments Massaro.
Massaro adds that there is another more plausible reason, which is risk aversion. He says that many investors, some even somewhat romantically, saw Bitcoin and other cryptocurrencies as a totally separate class, disconnected from the financial market, unaffected by market fluctuations and free from the influence of central banks. Now, however, the crisis has shown that this is not true.
“Ever since cryptocurrencies became popular, have emerged as market-correlated assets. In recent times, movements in international interest rates (particularly in the United States, where the rate is rising, and in Europe, where it is expected to rise soon) have generated a lot of apprehension among investors, who are avoiding risky investments. And the cryptocurrencies, in this case, they are seen as a high-risk investment”, explains the administrator.
Is it time to buy or sell?
Although the maxim of the financial market is “buy low and sell high”, Massaro suggests caution before purchasing assets that are priced below normal. As much as the fall is supposed to be a buying opportunity, due to the crisis that the world is experiencing, it can be risky to invest at this time.
“Cryptocurrencies could fall further and that could lead to a loss of interest from investors. Consequently, they may cease to exist and thus will not return to their original values. The expectation that the fall will end and a new bullish cycle will begin is not always a reality”, warns the GEAF coordinator.
Despite the crypto winter, some analysts claim that bitcoin recovers well in times of crisis. However, for Massaro, such a statement is debatable due to the volatility of the digital currency. “The story that it’s just a time of crisis doesn’t portray what we’re seeing right now. The cryptocurrency is not recovering well, on the contrary, it is falling. With the increase in the interest rate, the thesis that Bitcoin would be like a hedge (investment strategy that aims to protect the value of an asset) has not yet proven true”.
Cryptocurrency investor profile
Due to the fact that cryptocurrencies are highly volatile, the profile of investors in these assets is more aggressive, since they are looking for big movements and are aware of the risk. There are also other profiles, such as people connected to technology, who are delighted with blockchain (technology that records user transactions). There is also the profile of the people who follow thefashion”, but who do not even care to know the market and, as expected, they are the most affected when it goes wrong.
Massaro explains that anyone can invest in different cryptocurrencies, with variable prices, bitcoin being one of the most expensive. “Cryptocurrencies, in particular bitcoin, fragment, that is, they break down into multiple very small fractions, which allows a person with little money to enter this market. There is no restriction on the amount invested”.
Such ease makes more and more people invest in digital currencies. According to statements issued by investors to the Federal Revenue, in 2021 alone Brazilians moved USD 50 billion in cryptocurrency transactions, double the result recorded the previous year.
Necessary precautions before investing in cryptocurrencies
The first step is to understand the market and know which exchange (broker) your money is applied to. “There is a saying in the world of cryptocurrencies that goes: ‘if you don’t have the keys, they are not your coins (not your keys, not your coins)‘. Then, you have to be careful with the ‘physical guard’ of the coins in the exchangessince we have seen some restricting withdrawals and suddenly ceasing their activities”, guide Massaro.
Another care is with the oscillation of the market and the great devaluations. For it, it is recommended to study and take into account that it is a high-risk, volatile and unregulated asset. “The rules of diversification, placing relatively little money and not concentrating risk too much must be fulfilled multiple times”, concludes the GEAF coordinator.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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