The cryptocurrency crash is, perhaps, the last thing on most people’s minds right now. The coronavirus pandemic has afflicted almost all of our daily lives while it is wreaking havoc on stock markets, leaving us staring down the barrel of a global recession that could make the Great Depression look like a tea party.
As corona fear began to take hold, on March 12 the US’s leading stock index the Dow Jones dropped 2,300 points – its worst day since 1987’s “Black Monday.” Similarly, bitcoin tanked nearly 40% in two days and was down over 50% from its mid-February peak of $10,000 a coin.
Altcoins, as they tend to do, followed bitcoin and dramatically dumped as well. As of today, bitcoin has rebounded to just under $6,000 a coin, while Ethereum has retraced above $125 after plummeting to as low as $109 from a high of nearly $275 in late February.
For an introduction to cryptocurrency, check out our guide: ‘Cryptocurrency 101: How to make it big in altcoins’
Buy the cryptocurrency crash?
Of course, we don’t yet know where this is going, how long the volatility will last, or the long-term ramifications. Some, though, might wonder if they should seize the cryptocurrency crash as a moment to buy. After all, every time bitcoin reaches $10,000, investors bemoan: “I wish I had bought at $5,000.” Well, this could be your chance.
Things could, however, get much worse before they get better. In the face of another global recession its feasible that bitcoin could drop to $3,000 or below. Its temporary bounce to over $6,500 on March 20 could have been a bull trap set by institutional investors as they prepare to dump even more bitcoin back into the market. Blockchains may be transparent, but the causes of price swings are opaque: bulls and bears with millions of dollars dictate the market’s movement, while retail investors simply take the ride.
A black swan event presents a unique opportunity for long-term investors, but no-one can predict the bottom, and it’s damn near impossible to time it. Swing trading should also be considered highly risky at the moment. Most people (this author included) get burned when they swing trade, and very few reap the rewards. Ultimately, never put what you can’t afford to lose in cryptocurrency.
Hard lessons for crypto
Despite the fluidity of the situation, some interesting lessons for crypto have already emerged from this crash. For a long time bitcoin has been considered a hedge against global instability – a safe haven during times of international financial distress. In light of recent events, though, it appears this may not be the case.
It’s not entirely surprising that cryptocurrency was dumped. Bitcoin’s liquidity makes it a particularly easy asset to sell when facing the potential of another global recession. Most likely, institutional investors were shaken out of the market while financial advisers that put a slug of their clients’ portfolios in crypto may also have pulled out. This, combined with some selling from shaky-handed retail investors and perhaps some opportunism from crypto veterans looking to dump and buy back-in at a lower price, could explain the tumble.
As stated before, this could present a great opportunity for long-term investors to buy. Currently, there are twice as many bitcoin longs as shorts – a bullish signal. However, another crash could liquidate them entirely and predicting bitcoin’s bottom is a futile endeavor. Only time will tell if the recent price rebound signals a reignited confidence or a phantom pump. Without a doubt, bitcoin will drop again – it always does.
A stable cryptocurrency crash
Some positive long-term signs have emerged from this tumble too, though. Unlike the NYSE, bitcoin’s trading never stopped through this latest cryptocurrency crash. The network never went down, and markets never closed to stop the bleeding. Moreover, $1.5 trillion USD was never haphazardly injected into the crypto market, only to watch it turn to ash.
On the contrary, bitcoin rallied without unprecedented stimulus packages, without cutting interest rates, and without providing tax relief. The only thing bitcoin lost was monetary value, not intrinsic value. If you owned one bitcoin a month ago, you still own one bitcoin today. Only 21 million coins will ever exist, and that hasn’t changed.
As the Federal Reserve scrambled to stabilize USD and print more money for banks and governments, the bitcoin network operated as normal, and markets stayed open 24/7. Bitcoin has proven itself to be easier to liquidate than stocks, bonds, real estate or gold because buying and selling can be finalized 24/7.
Crypto: A truly open, free market
Bitcoin is, arguably, what a true, open, free-market asset looks like. It’s money based on math, and despite losing fiat value, the elegant simplicity of the network contrasts sharply with the frustratingly complex monetary systems of today.
In the near-term, things look turbulent. Crypto trading will not replace your income, and it won’t make you rich overnight. What you buy today will, at some point, lose monetary value. The goal, however, is not to have more money. The goal is to have more bitcoin.
If you think cryptocurrency will gain value in the long-term, then now might be a prudent time to buy. Consider it a five year investment and you will save yourself a lot of headaches over price action. However, be cautious: always do your own research, don’t FOMO, and don’t feel regret if you didn’t buy before bitcoin rallies. Most importantly, stay safe.
Disclaimer: I am not a financial advisor and this is not financial advice blah blah blah blah
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