The crypto space is not new to experiencing market crashes. The volatility of the crypto space coupled with the supply and demand curve that the ecosystem experiences lead to market behavior. In the last few days, the majority of top tokens have slid significantly from their positions and this has become a cause of concern for investors as well as other stakeholders.
Why is the Crypto Market Crashing?
As an overview of the recent happenings in the crypto space, there are several factors that might have contributed to the latest crash. Reports have been pointing at specific inventorial behavior where due to U.S. policymakers tightening the monetary supply, investors have been selling their crypto tokens. This behavior has caused a rift in the supply and demand curve that directly contributes to the value of any tokens. Not only did this behavior push crypto prices lower but have also put stress on institutions and other large players in the field who have made investments near the top of the market.
6 Reasons Behind the Recent Crypto Market Crash
The crypto price moves can be affected by various reasons like interest rates, inflation, and other factors that can affect how confident people feel about investing their money in alternative assets. The crypto ecosystem is experiencing drawdowns in 2022 as the crypto market has been bracing for action from the U.S. government on multiple fronts.
As monetary policymakers show interest in an effort to slow inflation, the Biden administration has ordered federal agencies to develop detailed plans for crypto oversight. Market behavior like this reminds us that the crypto space still remains a relatively new technology whose full effects on the worldwide economy are not yet clear.
Some of the major factors that have led to the recent market crash are:
- Correlation to indexes: The crypto market has become more intertwined with the traditional stock markets in recent times due to the traditional adaptation of the crypto asset in some places. Following the Nasdaq indexes, the crypto markets have followed suit and shredded more than 10% or almost $200 billion over the past week. What investors need to determine is their time frame for holding their crypto assets and decide if they are investing for the long term or short term.
- Leveraging of Crypto Investors: 2021 has been a year full of institutions taking up chunks of crypto assets for their reserves. Cutting to 2022, the institutions are more inclined toward taking action as per the market behavior, according to Moya, the senior market analyst at Oanda.
- Supply and Demand: One of the biggest challenges that the crypto market face is when leveraged investors liquidate a huge chunk of their crypto tokens. As the crypto market runs on the basis of supply and demand, it is not likely that the ecosystem has investors waiting to acquire tokens as and when there is a huge availability. This is also one of the main reasons why the crypto markets crash on certain occasions.
- Inflation deflating the economy: The inflation rate across the world has spiked which has led many to hold on to their assets and fiat liquidity. To top it all, the interest rates of banks have started to increase alongside the repo rate.
- The Ukraine and Russia crisis: The Ukraine and Russia war is instrumental in causing many people to move their liquid money and assets on hold. In addition, Ukraine has also received donations in crypto assets which may have caused a slight decrease in supply. With supplies being put on hold across countries owing to the war, people have abstained from investing in crypto to hedge against the ongoing onslaught.
- Some crypto assets have caused financial dilemma: With a few instances of security issues and bogus ICO launches in recent months people are taking precautionary measures to make sure they invest in the right asset.
The above reasons have had a snowball effect. But hodlers know how the bullish market opens in the bear uptrend.
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Investing Principles for Crypto Assets
The main aim of including crypto in a portfolio is to make the portfolio diverse. For example, if your total budget for investing in digital assets is ₹10,000; you can divide 30% of the amount between tokens of your choice. Given the strategy, it is also important to keep the volatility of the crypto market in mind. Evident by the recent market behavior, several factors club together in making the whole of the crypto space bullish or bearish.
Though the factors driving each crypto crash are different, it can be helpful to remember a few established investing principles.
- Do your own research before diving into investing.
- Start with investing small amounts in various buckets.
- Make sure the amount invested is recoverable.
- Do not invest in FOMO
- Try to get an understanding of the market behavior before taking any step.
There are already thousands of crypto projects already available in the market at present time and newer tokens are still being worked upon. This means that despite the overall volatile aspect of the crypto market, it is possible to curate a balanced crypto portfolio that is suited to your goals, time frame, and risk tolerance. It is always a smart move to diversify your portfolio to manage the volatility of the investing space.
Additional Read: How to diversify your portfolio?
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