We've been seeing a noticeable downturn in the crypto market. Does that mean now is the time to buy? This is what you need to know.
Bitcoin (BTC) and other cryptocurrencies have been plunging in value in recent weeks. In fact, on January 21, 2022, the total cryptocurrency market lost $205 billion in a mere 24 hours.
As I write (on January 27), the price for Bitcoin has fallen more than 22% since the beginning of the year.
That means, if you had $1,000 invested in Bitcoin on January 1, you'd have only $780 today.
Other cryptocurrencies have seen sharper plunges. Ethereum (ETH), the second-largest cryptocurrency, is down more than 35% year-to-date. And Solana (SOL) has lost nearly half of its value.
Volatile markets can be scary. But they're not the end of the world. Let's take a look at what you should be doing now as a cryptocurrency investor.
One of the big reasons why cryptocurrencies are down is because of uncertainty in the U.S. economy.
We've been seeing rising inflation rates since the COVID recovery began. In December 2021, inflation rose by 7%, the highest rate seen in nearly 40 years.
That's led the central bank of the U.S. — the Federal Reserve — to suggest it will start raising interest rates soon in order to battle inflation.
Now, whenever the Federal Reserve raises rates, it's bad news for tech stocks. That's because, typically, they depend on taking on debt in order to fund projects.
And when interest rates rise, the cost of adding more debt takes a bigger bite out of revenue. That can slow growth for many tech firms.
So in recent weeks, investors have been bailing out of tech stocks, causing them to crash.
That's led cryptocurrencies to follow suit, since their values tend to correlate to the tech sector.
Until relatively recently, the values of cryptocurrencies weren't correlated to stocks. They were traded mainly by market "outsiders" and were considered a safe haven from stock-market turmoil.
But that's changed for two reasons:
With all of these stock-market investors getting into cryptocurrencies, it's no wonder that their values are now following those of stocks — particularly those in the tech sector.
Of course, nobody is able to see into the future. (If only we could!)
Unlike companies, cryptocurrencies don't have underlying assets to keep them from falling to zero. There's no inventory, real estate, or royalty value to provide at least some value.
That said, most analysts are expecting many cryptos to recover.
In fact, Bitcoin bulls forecast prices as high as $100,000 this year. As the largest cryptocurrency, that would likely boost many other cryptos as well — particularly altcoins that are measured in Bitcoin.
If you've been considering an investment in the cryptocurrency market, now might be the right time.
The current pullback in prices has opened up opportunities to buy digital coins at low prices.
However, as you would before entering any kind of trade, think rationally. Don't buy just to buy. Do your research to make sure the crypto you're buying is worth even a discounted price.
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