on the crypto
Just a week ago, cryptocurrency prices were in green and Bitcoin (BTC) had surpassed $ 24.000 for the first time in over a month. Total cryptocurrency market capitalization was finally back above the $ 1.000 trillion mark and some investors dared to hope the worst was over. Unfortunately, these hopes turned out to be unfounded. Several news reports, including Tesla's revelation that he had sold 75% of his Bitcoins, stopped the brief rally.
It would be great to think that cryptocurrency prices have dropped to the maximum and that we can leave the difficulties of the last eight months behind. But it is unlikely. There are too many obstacles to overcome and prices may still fall.
Because Bitcoin probably hasn't hit rock bottom
Nobody has a crystal ball and it is impossible to know for sure what Bitcoin's next moves will be. However, we can look at the factors that can affect prices and make some assumptions. There are two main reasons why the current price collapse is likely to continue: macroeconomic conditions and market confidence.
1. Macroeconomic conditions
Many economists warn that the United States could soon face a recession. Furthermore, consumers are grappling with the skyrocketing cost of living, the crisis between Russia and Ukraine shows no sign of abating and Europe is in an energy crisis. This is not conducive to a cryptocurrency rally.
Part of the reason cryptocurrency and stock prices fell this week is the uncertainty over two announcements expected in the coming days. First, the Federal Reserve will decide how much to raise rates. A rate hike is not good for cryptocurrency prices, as it can lead investors to abandon riskier assets.
The other number to watch is GDP. One way to define a recession is negative growth for two quarters. If the Bureau of Economic Analysis says the economy declined again in the second quarter of this year, we can expect a lot of headlines about the recession. Not everyone agrees with this data (or with this definition of a recession). But the perception that we are in a recession is also likely to impact cryptocurrency.
2. Trust in the cryptocurrency market
A lot has happened in the cryptocurrency industry in recent months and it will take some time to rebuild people's trust. We have seen the collapse of a major currency and the implosion of several cryptocurrency lending platforms, as well as a drastic drop in prices. Unfortunately, many people who first bought cryptocurrencies last year are now inundated with their investments. This means that the value of their portfolios is less than the initial investment.
Additionally, there is a new cloud looming over cryptocurrencies. The SEC said at least nine of the cryptocurrencies traded on Coinbase are actually stocks. The worst case scenario is that the SEC takes action against these individual projects and against the cryptocurrency exchanges that have traded them. The SEC is already filing a lawsuit against Ripple (XRP), and maybe more will come.
Finally, investors are waiting for regulatory clarity. It is difficult to understand how prices can rise again if we do not know what form the increase in regulation will take. On the bright side, the US is extremely unlikely to follow China and ban cryptocurrencies entirely. But they could, for example, carry on their own digital dollar. They could also introduce much stricter registration requirements and trading rules. All of this would have significant implications for the cryptocurrency industry.
What it means for investors
If we all could predict the market, we would be able to buy at the absolute lows and sell at the highs. But that's not how investing works, and trying to find the absolute bottom can instead lead us to make emotional decisions.
It is important to think long-term and evaluate the performance of Bitcoin and cryptocurrencies over the next five, ten or even twenty years. There are reasons to be optimistic: Some finance gurus believe Bitcoin could one day be worth $ 500.000 or even $ 1 million. However, there are also reasons for caution: cryptocurrency could change the way we use money, but it could also completely collapse.
If you are optimistic about Bitcoin, you might consider this period as a larger accumulation period, rather than trying to find the bottom. If so, be sure to invest only money you can afford to lose, and don't prioritize buying cryptocurrencies over other financial goals, such as the emergency fund and retirement savings. Bitcoin could still go down, especially if the global economic situation worsens. The trick is to position yourself to benefit from any gains, but make sure you don't face financial ruin if cryptocurrency prices drop to zero.
