In recent months, cryptocurrency appears to have undergone a protracted crash—or a correction at the very least—with the market capitalisation of all crypto assets falling from roughly $US3 trillion in November 2021 to around $US900 billion.
Some crypto lenders, including the US based Celsius Network, resorted to freezing withdrawals, as investors panicked at the precipitous fall of stablecoin, TerraUSD, and its sister coin, Luna, in May. Meanwhile, Coinbase, the largest crypto exchange in the US, confirmed plans to shed nearly 18 per cent of its workforce, with the company conceding it had grown too quickly (they also cited inflationary pressures and the prospect of a global recession).
Given the old investment adage ‘buy the dip’, investors may now be looking for a piece of the volatile crypto market in hopes this marks a temporary downturn rather than a long-term bear market or extended crypto winter.
If you’re thinking now is the time to buy, here’s a look at previous trends, some expert opinion and tips on buying if you’re new to cryptocurrency.
In late June, Bitcoin (BTC) fell 30 per cent in a week to around $US21,000, which was at least an improvement of its fall to $US18,000 some weeks prior. To put that into perspective, back in November 2021 Bitcoin traded for as much as $69,000. Ethereum (ETC) is trading at $US1080, which equates to a drop of more than 70% from previous highs. A more than 50% drop represents significant losses.
While this doesn’t yet match the severity of the 2018 crash, in which Bitcoin lost 80% of its value, experts say things could still get worse for those left holding BTC.
It’s these kinds of losses that have prompted corporate regulator Australian Securities and Investments Commission (ASIC) and the federal government via its Moneysmart site to issue warnings to crypto investors. Moneysmart says there are no guarantees of returns, and that people should tread carefully when investing in such a volatile market (and to watch out for scams).
Inflation, downturn and war
Co-founder of automated crypto trading platform Coinrule, Oleg Giberstein, thinks crypto is undergoing the same stresses as other parts of the economy, leading to the fall in prices.
He said: “It’s not just crypto that’s down, everything is down, and over the next six to 12 months the economic outlook is bad. Central Banks are between a rock and a hard place with regard to slow economic growth and high inflation. So, investors are escaping ‘risk-on’ assets like crypto and tech stocks.”
As for whether this downturn marks the beginning of a long-term trend or a temporary blip, Giberstein believes the market could remain challenging for up to two years, but added things could worsen during that time.
Sam Kopelman of crypto exchange Luno agreed that Bitcoin and other coins’ misfortunes weren’t happening in isolation: “Investors dumped assets across the board yesterday as global stocks suffered the worst day since June 2020. The market is battling the consequences of rapidly rising US interest rates, alongside military conflict in Europe.”
Is ‘buy the dip’ a good strategy?
The principle of ‘buy the dip’ is based on an assumption price drops are temporary aberrations that correct themselves over time. Dip-buyers hope to exploit dips by buying at a relative discount and reaping the rewards when prices rise again.
Crypto markets are volatile, so buying cryptocurrencies at any price – let alone a dip that might become a long-term trend – is risky. While prices could return to previous levels, they could also fall even further, leaving your investment underwater.
If the past is prologue, then the current dip (or crash, depending on your perspective) could bounce back as it did last year, when prices fell to similar levels before returning to pre-dip levels and even peaking in the spring. But of course, they might not.
Oleg Giberstein said: “Many a novice investor has been burned trying to ‘catch falling knives’”.
He advises those committed to ‘buying the dip’ to decide on a set amount of money they’re comfortable with using to buy BTC or ETH each month and not to worry too much about what happens to prices over the next two years.
Pavel Matveev of digital exchange Wirex advises buyers to hedge their bets. He said: “It’s important to diversify your crypto portfolios with different altcoins to mitigate risks.”
How to buy cryptocurrency
If you’re new to cryptocurrency, and keen to invest, we’ve put together a guide to walk you through the process, including how to choose a platform, what fees are involved and alternatives to buying coins directly. Read our How to Buy Cryptocurrency guide here.
This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency as an investment class.