You’ll likely see plenty of articles filled with reports on the ups and downs of cryptocurrency prices, but few dig into the WHY behind the Crypto Currency Crash.
Here are the seven developments we’ve been tracking in the crypto markets:
Crypto traders say government debt is the reason that traditional, paper-based currency will eventually die, but many need to look in the mirror. Some crypto traders are using 100x leverage (aka debt), according to CNBC, meaning a 1% decline wipes out all equity. This has exacerbated the recent sell-off.
The Musk factor:
Elon Musk’s outsized personality moves crypto markets, notably in dogecoin. What Musk hath giveth in February (after announcing Tesla bought $1.5 billion in bitcoin), he hath taketh (by reversing his decision to allow people to pay for Teslas with bitcoin, citing environmental concerns).
Musk isn’t wrong. Despite crypto’s digital nature being a natural fit for millennials, it doesn’t square with their ESG leanings (investing based on environmental and social impact). The Wall Street Journal recently reported that bitcoin mining is breathing new life into shuttered fossil fuel power plants. And Cambridge University found that bitcoin uses more electricity than the entire country of Argentina.
Regulation, China edition:
The biggest crypto sell-off occurred after China, the preeminent mining country, announced a significant reversal on the practice. The country also announced plans to limit crypto transactions as it preps its own digital yuan offering.
Regulation, U.S. edition:
Noting that cryptocurrency could be used in tax evasion and illegal activity, the Biden administration has proposed that transactions above $10,000 be reported to the IRS. While these are the same rules applied to cash, the timing of the proposal was unfortunate for the crypto markets.
Use case concerns:
Tesla’s reversal banning bitcoin as payment, along with the currency’s use to pay ransom for the cyberattack on the Colonial Pipeline, reminded the market that the use cases for crypto are still limited at this time.
Due for it:
Despite the recent sell-off, prices for higher-profile tokens bitcoin and Ethereum are up 320% and 1,180% in the last year, and joke cryptocurrency dogecoin is up 14,540% during the same period! At some point, a pullback was inevitable.
At Millennial Money, we keep that final point in mind. Any investment that’s up 320% to 1,180% in the past year will be prone to more volatility.
If you’re investing in cryptocurrency — and keep in mind, we’re bullish on the future adoption and growth of cryptocurrencies like bitcoin and ethereum — this moment is a powerful reminder to:
- Avoid the path of FOMO: Far too many investors buy both individual stocks and cryptocurrencies after big price run-ups because of FOMO (fear of missing out). The problem? Once a correction hits, FOMO investors tend to also be the first to sell in a hurry.
- Dollar cost average: Rather than buying a cryptocurrency once, spread your buys out over time and at a number of price points.
Finally, we’ll note that cryptocurrencies are new and likely not for everyone!
And that’s OK. Many investors will be drawn to the promise of “money for the Internet age” while other investors may simply see crypto as too volatile.
If you’ve been interested in cryptocurrencies but the volatility of the past week worries you, this week we’ve created a special report on “backdoor” strategies to take advantage of the long-term potential of cryptocurrencies while investing in lower-volatility assets.