The cryptocurrency buzz spread all across the globe, and many investors decided to add digital currencies to their portfolios. However, the cryptocurrency market’s market volatility and occasional crashes translate into shockwaves. Some effects can even be felt in the wider global economy.
In this article, we’re analyzing the latest crypto crash and what it means for the economy. So, if you want to learn more about the topic, or if you’re thinking about investing in crypto, check out the following paragraphs.
Crypto Market Evolution
Cryptocurrency has recently enjoyed unprecedented trading levels and growth. It’s all been backed up by the unlimited potential and FOMO around crypto. However, the occasional drops in value for the major cryptocurrencies can send ripples across the economy. Does this mean Bitcoin, Ethereum, and other cryptocurrencies have broken their promises?
The short answer is “no”. However, the sudden dips in value can lead to considerable losses in the crypto market. For example, around $1 trillion had been wiped off the total market cap when Bitcoin lost approximately 50% of the value compared to 2021.
Stepping back a bit to observe the full picture reveals a natural pattern in crypto evolution. Since 2009, when the crypto market was truly born, there have been many periods of growth and contraction that contributed to the evolution of the sector. Of course, it doesn’t mean that the crash did not hurt investors. At the same time, millionaires have been made in short periods of time, and there’s always a way to cut your losses.
Causes for a Crash
More than before, Bitcoin tracks the S&P 500, leading to a strong correlation between them. In this environment, macro events gain particular importance. Take the Russian – Ukrainian conflict as a recent example. It makes investors see the future in grim nuances, and the tendency is to sell crypto to protect themselves from losses. If you add the historic rise in inflation across the globe and the various interest rate hikes observed in 2022, you have the perfect storm.
The Impact on Economy and How Act
In the free market, someone always has to win while others have to lose. If you want to make sure you’re on the winners’ side, you need to make sure you’re in a good position. This status can be achieved by keeping a close eye on the following five factors put together by industry experts.
1. Monitoring Macroeconomic Trends
Macroeconomic trends definitely have an impact on crypto. However, if you monitor them closely and take the needed actions, you should be able to improve your situation. When the trends show a high fluctuation in price for the main crypto, stablecoins represent a safe haven for those that don’t want to get drawn into the rollercoaster.
2. Watch On-chain Metrics
Another barometer for the sentiment that you need to follow closely, on-chain metrics are also crucial. Before the latest crash, BTC enjoyed a massive inflow into exchanges, and there was a massive interest in the margin. When everyone started liquidating leveraged longs, it was a sign that something terrible was about to happen. Keeping an eye on these metrics will allow you to stay on top of the situation or at least lower your losses.
3. Dollar-Cost Average
For a retail investor, the dollar-cost average you need to keep in position. One promising approach is to average out as prices go down. And while the prices should bounce back in the future, you shouldn’t expect BTC to go back to $60K in a week.
4. Add Yield Bearing Assets to the Portfolio
Another approach to limit your exposure during a crypto crash is to get into yield-bearing assets. Staking your stables and assets is recommended when huge fluctuations take place. Staking is the process that occurs when coin holders block a percentage of their currency for a predetermined period of time. In exchange, you get rewards like additional coins or in other forms. Furthermore, staking will help you mitigate market volatility and safely reach the next stable or growth period.
5. Don’t Get Emotional
While this final advice is easier said than done, investing needs to be separated from emotions. Getting caught up in a fantasy of huge returns overnight is easy. Likewise, fearing the worst during a dip and exiting out of fear can mean robbing yourself of the stake and profits.
So, an unbiased approach is essential. Risk is part of the big picture so you need to watch the above-mentioned factors and set emotions aside. Try to set personal goals for your portfolio, don’t forget about stablecoin, and establish clear entry and exit strategies.
Crashes are unavoidable, no matter if we’re talking about crypto, stock exchanges, or any other form of investment. After all, such an event acts as a cruel reminder that markets often tend to be cruel mistresses. So, getting educated on the topic is essential for getting good results. Making the right decision regarding your portfolio is strongly linked to knowing the market, its major influences, and the signs that could lead to a crash. Do proper research and always make sure to have a rigorous plan.