COLLAPSE OF CRYPTO PRICE, REALITY OR A BUYING OPPORTUNITY?

Since the end of March, the price of Bitcoin has been dropping slowly. In May, however, it became worse; Bitcoin dropped further than it had in the preceding month, immediately causing the catastrophic failure of Terra, a cryptocurrency project which was once valued at more than $50bn.

This week, Bitcoin fell below $21,000 for the first time in over 12 months. The cryptocurrency is down more than 68% from an all-time high near $68,990 in November 2021. Likewise,  Ethereum is down 63% from historic highs set in November. In both cases, over 50% of the decline occurred this year. 

Experts have warned that things could still get worse, though the current situation doesn’t yet match the severity of the 2018 crash in which Bitcoin lost 80% of its value. Nonetheless, Investors are at crossroads. Many, following the old investment adage ‘buy the dip’, are looking for a piece of the volatile crypto market in hopes that this is a temporary downturn rather than a long-term bear market. Also, some investors, in a bid to be careful, have asked the critical question "Should I buy the dip?"

Is It Time to Buy the Dip?

In November,  Bitcoin was trading at around $69,000. Then, it suddenly slipped to around $55,000. It was called 'dip' and many investors jumped to 'buy the dip'. A couple of months later, Bitcoin fell to around $45,000. It was another chance to buy the dip, and many investors took that chance. Then, it dipped to around $33,000. The hopefuls bought the dip. Now, Bitcoin is trading at around $23,000. 

The principle of buying the dip is based on an assumption that price drops are temporary aberrations that correct themselves over time. The buyers hope to exploit dips by buying at a relative discount and reaping the rewards when prices rise again. It has happened many times before and it can happen again. However, cryptocurrency markets are volatile; buying crypto at any price – dip or no dip – is risky. Although prices could return to previous levels, on the other hand, they could leave your investment underwater by falling even further. 

If the past is prologue, then the current crypto crash could bounce back as it did last year when prices fell to similar levels before returning to pre-dip levels. But of course, it's just a possibility that they might not. Worthy of note that every kind of investment has past performance, which is no guarantee of future results. 

Whether or not to buy the dip cannot be answered in one word. You may have to ask yourself questions before taking either step. Ask yourself what amount of money you can afford to lose, because any investment has its inherent risk.

Source: CoinMarketCap 

Why is Crypto Crashing?

The specific reason for the current dip is yet to be identified. There are however speculations: the decline has been attributed to comments made by Bill Gates on Reddit,  in which he shared his thoughts and displeasure about how the value of crypto is based on what one person decides. Tesla also made a U-turn on accepting Bitcoin as payment for its products. 

China, in the latest wave of restrictions on cryptocurrencies, ordered Bitcoin mining in its Sichuan province to shut down completely and told banks to stop supporting crypto transactions. All these are thought to have had an impact on the global crypto market. 

The crypto crash has also been linked to a massive sell-off by investors amid heightened inflation fears and pausing of withdrawal by crypto lending service Celsius. Investors are also staying away from riskier assets, which is consequently reflected in the stock markets as well. 

Crypto Price Correlation with Tech Stocks

One of the limitations of Bitcoin is its dependence on economic policies that so often cause ups and downs in equities. In the current market state of rising interest rates and increased inflation, most assets have been hit hard, Bitcoin included.

Amid this downturn, questions have been raised as to if Bitcoin is correlated or uncorrelated to stocks. 

According to CoinDesk, for almost all of 2021, Bitcoin remained within a range of minus 0.2 to 0.2 when compared to the S&P 500, gold, the U.S. dollar, and bonds. This value indicates that they are largely uncorrelated. Blockchain Center, which monitors cryptocurrency price movements, conducted further research which proves that Bitcoin was uncorrelated to the S&P 500 even further back for a stretch of nearly two years from 2019 to 2021.

However, times have changed and market conditions are becoming less focused on growth. Both the CoinDesk report and data from Blockchain Center revealed that Bitcoin started to become correlated to the S&P 500 in the last quarter of 2021. The 90-day correlation between them increased from 0.2 (no significant correlation) to about 0.6 (fairly strong correlation).

What To Do? 

Experts suggest refraining from moves buying large amounts of cryptocurrency all in one shot when investing. A price drop after investing large amounts could be catastrophic. Whether the price goes up or down, it is advised to buy a small amount every month, as opposed to buying it all in one single crystalized cost.

Considering the volatility of crypto, it is way too much risk to make cryptocurrency your only investment. Even when investing, diversification is a good idea. It is helpful to do your research and buy a handful of crypto assets that you believe are promising– there are thousands of cryptocurrencies. This helps to spread your risk; if one falls in value, others may not. In rare cases, most of them may go down. This only shows how unpredictable the crypto market may be. So, you are, in the end, the sole decision-maker and risk bearer. 

Conclusion 

If the past is prologue, then the current crypto crash could bounce back as it did last year. But of course, it might not. Worthy of note that every kind of investment has past performance, which is no guarantee of future results.