The world of cryptocurrencies has changed how many people look at investing. With many cryptocurrencies making considerable gains in brief periods, a lucky few have become millionaires overnight. In this blog, I go over some key things to consider before handing over your hard-earned money in exchange for some crypto tokens.
Quickly, Let's Crunch the Numbers
At the tail end of 2021, cryptocurrencies of all kinds had just finished a strong year. On average, the S&P 500 had doubled its average return, hitting an impressive 24%, rather than the typical 11% seen for the last forty-plus years.
Some say it is outstanding compared to the stock market. From the start of 2021 to the end, the combined value of all crypto grew by 176%, worth $2.14 trillion.
A major driving force of this considerable success is the rise in NFTs, also known as non-fungible tokens, which are integral to making gaming in the metaverse a reality. On top of that, many have seen NFTs as a great form of investment, with many creators and buyers seriously flipping these digital assets and becoming millionaires overnight.
But as the age-old saying goes, "what goes up must come down" seems to ring accurately repeatedly. If that's the case, this change in the digital asset market could be harrowing.
Five Reasons to Watch Out for a Possible Crypto Crash in 2022
It's crucial to note cryptocurrency is about speculation; although things look great right now, it's wise to remember that this too shall pass. Below are my five key points to keep in mind about a possible cryptocurrency crash:
1. History May Not Repeat, But It Sure Does Rhyme
History may not repeat, but it sure does rhyme. Typically, when it comes to crypto, there's a build-up or upswing in the prices of these assets, and then a sudden and usually dramatic decline materializes. At the moment, we are heading towards a significant drop-off within the crypto market.
Since March 2020, the cryptocurrency market has seen a 14-fold increase in its valuation, worth $2.14 trillion. That's no small change. From March 2017 until January 2018, there was a 35-fold (you read that right, 35) in ten short months. After that, many cryptocurrencies declined by 90% over the next 11 months, with many enthusiasts and investors jumping ship.
For example, tokens such as Nano, Ripple's XRP, and Litecoin had huge gains ranging from 24,000% to 462,000%, only losing 93% to 99% of their value for the next two years. It might seem easy to make money, especially if everyone makes cash hand over fist, but things can change quickly.
2. Too Much Too Soon When It Comes to Blockchain
Blockchain technology has excited people across many industries for what the future holds, but sometimes, too much of a good thing needs a better future. In this case, for all you investors, patience is a virtue.
What has happened is that many people have gotten ahead of themselves, and investors feel that this tech will become an integral piece of society and many businesses much sooner.
3. Strong Ties to The Stock Market
Many experts and crypto enthusiasts predicted that digital currencies would eventually become their own thing, separate and independent. But it's 2022, which has yet to happen and shows no signs of changing soon. As of yet, cryptocurrency values are still strongly coupled with the activity going on in the stock market.
The American money supply continues to soar to prop up the economy that COVID-19 devastated. A great example is Bitcoin, which has a market cap of 21 million tokens, meaning there's only that specific amount to buy, sell, or trade. Many investors took their money and bought Bitcoin or other coins to find a new haven for investing.
If the crypto bubble burst, you will see people pulling what money they can get and dumping it into stocks. What is happening is that people are using crypto instead of the stock market as an additional option rather than something completely separate. So, investors will be pumping money into digital tokens if the stock market isn't doing as well or crypto is doing better.
4. Margin debt wreaks havoc
So many investors tend to leverage their debt to buy more cryptocurrency tokens heavily. As more and more people increase their debt margin, there's a real risk of the bubble bursting and things falling apart.
Essentially, investors borrow money and pay interest later as they purchase more and more digital tokens. If the prices don't increase as hoped, they are stuck with massive debt and some worthless tokens. Simply put, these investors are playing with fire regarding the market.
5. Fear Of Missing Out (FOMO)
Amongst those in the crypto community, there tends to be a strong sense of FOMO or fear of missing out. It's not uncommon for someone like Elon Musk to shoot out a text advocating for some unknown meme coin, and then, all of a sudden, droves of people everywhere are flooding the market.
What ends up happening is this sucks the life out of the crypto market, causing high peaks and painful valleys when the price of the token changes. Falling in and out of love hurts long-term investment potential and creates chaos.
The meme token Shiba Inu is no stranger to this fact, with massive gains of 45,000,000% and Floki Inu, which increased by 3,119% and 2,763% until December 2021.
Hungry for more? Join me each week, where I'll break down complex topics and dissect the latest news within the cybersecurity industry and blockchain ecosystem, simplifying the world of tech.