Crashto

Reasons behind recent trends in cryptocurrency

Braden Dent

TO ALL THOSE WHO have holdings in or may have been watching the state of crypto, you will know that over the past few months, most cryptocurrencies have seen some of their worst decreasing trends in history. This has scared many investors, emphasised the extreme volatility that coincides with cryptocurrency, and ultimately created an unpredictable market where buying and selling may both be viable options. 

Whilst we have witnessed cryptocurrencies crashing in the past, we have never seen it occur on such a large scale. The first major cryptocurrency crash was in December of 2017 when many coins (e.g., Bitcoin & Ethereum) saw 50% decreases in their value over a 5-month period. Whereas now, throughout the past 6 months, these same popular coins have undergone decreases ranging from 70-80%. So, what are the reasons behind these negative trends? 

The predominant reasons revolve around the gradually increasing interest rates and fears of inflation, which are subsequently discouraging people from choosing to invest in risky assets such as cryptocurrencies. This has been mirrored through the stock market where big technology companies around the world have been experiencing poor trends as of late. Interest rates were close to an all-time low towards the end of 2020 and the beginning of 2021, which encouraged consumer spending and borrowing. In turn, this led to many people choosing to invest, creating a market that was firing on all cylinders and turning a blind eye to the possibility of a crash. Now that we are seeing rising interest rates around the world, people are re-assessing how they choose to spend their money, and this is incentivising people to escape risky investments such as cryptocurrencies or avoid investing in them all together so that they can remain financially stable. It is for this lack of demand that many coins such as Bitcoin are experiencing dramatic decreases in value.

Whilst many people may view crashing markets as a clear sign to liquidate all investments and “get out”, others may see it as an opportunity to invest in assets which are undervalued when looked at from a long-term perspective. As stated by billionaire investment analyst Ken Fisher, “Time in the market beats timing in the market”.  Meaning that choosing to invest long-term is far more beneficial than trying to pick the exact moment when you believe that a stock or other form of investment is going to be at its optimal buying price. While this may be true, in this day and age, having a long-term outlook is not an option for some people as they have short-term financial commitments that they need to cover.  

Although there are many long-term investors who seem unphased by the recent global conditions (inflation and interest rates) that have been affecting cryptocurrency, they have still lost over half of their original investments and due to the unforeseeable nature of the market, the worst may be yet to come.