Dear Blocksters, brace yourselves. Bitcoin and other cryptocurrencies are in a “dip” right now, to put it mildly. And of course, Vitalik Buterin is trending on Twitter about his take on Bitcoin and the crypto crash, driving even more fear, uncertainty and doubt about the crypto market.
Vitalik alongside many other mainstream headlines are predicting the worst, as Bitcoin’s price has fallen nearly 70% from its high in November, and Ethereuem dropping nearly 80%. Vitalik took a direct stab this week at PlanB’s well-known stock-to-flow (S2F) model, scrutinizing its $100K by 2023 prediction.
But how much of the headlines are click-bait and fear-mongering? What does the crypto-crash actually mean for investors?
What Is The Crypto Crash?
Beginning things off, last year China banned crypto mining, which put a temporary but very large halt on all Crypto availability. The law of Supply and Demand tells us that when the supply of something goes down, price goes up. This was true of Bitcoin, and there were record crypto profits in 2021.
Supply and demand of Crypto is interesting because “mining” currencies like Bitcoin involves validating complex coding. This is known as verifying the blockchain. Crypto miners are paid by the system itself by rewarding them with crypto coins of their own. This means there is a two-fold effect on Crypto prices when mining decreases: the first effect is that when there is less validation, the hash rate goes down; the second effect is that with fewer miners, less crypto is being awarded to them as reward, meaning less overall crypto.
The next factor fueling this crash began during last year’s high market–when crypto buyers began over-extending themselves. Like with any market, when the profits look too good to be true, people start borrowing money to get in on the action. The problem arose when people had to borrow money to buy more crypto, and then the prices went down because of the over-supply.
Finally, the whale’s stopped eating. More precisely, the big investors in crypto started to sell off their excess coins. And because the market was so saturated that people were borrowing money just to keep up with investments, when the large sell-offs happened, there was no one with enough capital to snatch up the extra crypto.
Late last year, this was set off by the crash of a particular crypto, Luna. Once Luna started to crater, it set off all the delicate balances of supply and demand, leading to a bit of a panic in the crypto-world.
What It Means For Crypto Investors
This could all mean good news for the prudent, liquid investor.
If you have a comfortable amount of investment power without having to borrow, you could very easily “buy the dip” as some experts call it. This means buying low, now, and then reaping the profits when crypto prices peak again, later on.
The problem is that crypto prices are falling at the same time the Fed is raising interest rates to record levels. This means that if you’re trying to borrow money to buy low on crypto, you could be setting yourself up for financial ruin.
According to the New York Times, though, blockchain will survive, and with it, the crypto market. Right now there are still movements to slow crypto mining operations, which could eventually drive supply back down, increasing prices. What this recent crash means for you, the investor, is to stay prudent, and only invest what you can stand to lose.
One reason to keep faith is, as I wrote earlier, the technology surrounding blockchain analysis is evolving, fast. With the development and deployment of Web 3.0, AI enabled transactions between machines will take place in a fraction of the time they take now. With better transaction times, as explained above, the crypto market should see greater ability to withstand fluctuations.
Another facet of crypto investing is NFTs, or Non-Fungible Tokens. These have also taken a hit. According to the LA Times, NFTs and other ‘meme stocks’ took a dive. But don’t panic on NFTs, quite yet. Other analysts have pointed to a large public interest in not only NFTs, but in continuing to make and market them. That points to a robust future ahead.
What It Means For Stock Investors
Stocks and the market itself has taken quite a hit recently, too. One of the biggest signs of that is that large investment firms are switching to bond investments, a dead give away that we’re in a bear market.
What’s interesting is that the International Monetary Fund has tracked the correlation between the Crypto and traditional stock markets over the last few years. This suggests that one can almost “feel out” one market by taking the pulse of the other.
This has borne out especially in the recent downturns of both markets. What the Crypto crash means for the savvy stock investor is that both markets, along with climbing interest rates, demonstrate that most investors are cash-strapped or just leery of investing it.
An investor can leverage cash-shortfalls among their competitors in a variety of ways, and I won’t give away secrets of my own, here. But suffice to say, the Crypto crash, along with other market forces, indicate that if you have a particular strategy you like to employ when no one else has cash, now’s the time.
All market crashes can be panic-inducing. What this Crypto dip might mean for you is largely dependent on how much liquid asset you’re carrying. If you have cash, you can easily swoop into either the Crypto market or the Stock market and grab some diamonds in the rough. If you’re not liquid though, with interest rates going up, now is not a good time to borrow just to buy low.
Today’s article was written by a guest writer, and fellow Blockster, Daniel Chen. Daniel, thank you for your article contribution. I hope that in the near future we will receive more articles from you! Cheers, Lidia. Co-Founder of Blockster.