Should We Worry When Crypto Crashes?

authorToni Becker dateJul 18, 2022 10:45:00 AM

Cryptocurrency is ever-evolving. In recent times, we’ve seen widespread crashes, with the market remaining low and unclear. That said, all stocks experience their ups and downs. The question we’re untangling in this article relates to why this happens, what it means for investors, and when to worry. 

The Crypto Market Crashes 

The crypto market free-fall marks the most dramatic drop in this market in years. Prices declined by over 60%, with a global recession looming and inflation rates rising. Billions of dollars of cryptocurrencies sank, with Bitcoin briefly sinking below $20,000 in June 2022 and Etherium falling below $800 during the same month.

With stocks also trading lower, investors have been taking a knock. This has affected smaller ecosystems and crypto services too, with the survival of tokens and crypto ecosystems coming into question. In investment terms, some may want to cash out while they can, while others ride the wave and even buy into the dip with hopes of cashing in in the future. 

Some are looking at this as a market correction rather than a crash. If so, then it could be assumed that this is a temporary downturn rather than a long-term bear market. Even if it is a market correction, the state of crypto could remain in this state for a couple of years, with worse still to come before getting better. To get a better understanding of what it is, one needs to analyze market trends, while simultaneously noting that past patterns, while likely, are not a guarantee.

In 2018, the crypto market also experienced a crash, where Bitcoin lost 80% of its value. Another macro factor is that global economies are suffering, with high inflation rates and the conflict between Russia and Ukraine putting pressure on various sectors. Generally speaking, the outlook over the next year isn't positive and it has been reported that more than $2 trillion worth of value has been wiped in the last few months. 

Reasons Not to Worry 

While cryptocurrency remains a fairly new investment asset, it’s been around for close to a decade. It has gained traction as the medium for value when it comes to decentralized platforms, which are developing at a rapid pace. 

As noted above, markets have their seasonal ups and downs. Various factors of influence have an effect on levels of optimism and skepticism. Due to this, investing in markets is known to be of medium to high risk, with volatility causing peaks and valleys. 

Crypto is experiencing a downturn, and while it is significant, it has experienced lulls before. The crypto market experiences cycles, whereby the price affects the interest, which spurs new ideas and finally, new projects and startups. This is reported in the 2022 State of Crypto Report by a16zcrypto, who has dubbed this the “price-innovation cycle,” which has guided the crypto market through its waves over the years. The report states that “the result is consistent long-term growth.”

With the emergence of web3, we’re seeing a different take on traditional economic models. For one, creators are awarded a far greater percentage share than big tech offers with web2. An average cost of minting an NFT, for example, is 2.5% - that is unheard of on social media giants, who take a far larger share from creators. This is despite the move for various social media platforms to design creator funds. NFTs also have the potential for creators to earn interest. 

With this, we can expect creators to grow and thrive in web3. With cryptocurrency being the medium, we’re likely to see an upward turn in the future. This is also backed by the investments being made in web3 that are helping it expand from its current infancy stage.

DeFi (decentralized finance) is also scaling up and having real-world effects. It makes trading easy for anyone with a smartphone, which most populations around the world have, despite not having bank accounts. This means there is greater inclusion in these markets, and thus greater room for opportunity and expansion. 

Crypto transactions also have the added benefit of online safety and transparency on the blockchain. With a public record of every transaction, it is possible to trade securely with the likes of smart contracts and avoid the need to deal with intermediaries. This is an attractive new system for many, and one that people already have a vested interest in. 

When we talk about the crypto market, it is important to remember that there are many players in the game. When it comes to web3, Ethereum is still the leader, though there is competition from various other blockchains. That is why it is important to analyze cryptocurrencies not only from a macro standpoint but from an individualized point of view as well. Other innovations in the blockchain space include the bridging of assets between blockchains and layer 2 technologies that expand the available blockspace. 

Two benefits of the crypto market are that it is generally not tied to real-world debt (in terms of assets that can be traded to recoup losses), and it is relatively small, meaning this crisis has limited exposure in global financial terms. The losses are also spread wide among investors, with the benefit of anonymity. Usually, a market correction can also have a positive impact overall, as the weaker projects are wiped out.

should you worry when cryptocurrency crashes

Tips for Managing a Crypto Crash

Mitigate Risk

The crypto market is volatile, so it is important to mitigate risk with various portfolios if possible. One should also not invest in these high-risk markets if they’re depending on a return from these investments or have short-term needs.

Remain Calm

Refrain from making decisions based on emotion. Remaining level-headed will help you determine if it is best to sell, stay put, or buy. Trading requires financial know-how, with individual portfolio assessments to determine what is best. 

Keep Reading 

Knowledge is power. Be sure to stay abreast of the latest cryptocurrency news and keep an eye on the market to pick up on trends and updates. This also brings into question bigger questions relating to crypto’s role in web3, and where you believe we are headed in the future. When it comes to crypto, learn about the philosophies and the ways that governments are reacting to this market around the world.

Cryptocurrency markets remain true to form - volatile. While this latest crash brings forth many questions, one needs to assess their own way forward from it. Perspective is important, as are long-term outlooks. 

Speak with us at Nexa about setting up and securing your corporate crypto wallet.

* This article is meant for editorial purposes and does not offer financial advice. Investors are encouraged to conduct their own research.