Cryptocurrency prices have been on a steep decline over the last two months, with no end in sight. While this type of volatility isn’t unusual, it can be unnerving when the biggest names in crypto lose roughly one-third of their value in a matter of weeks.
Market downturns can be a smart opportunity to invest heavily, as you’re buying when prices are lower. However, this assumes that prices will rebound eventually, which isn’t necessarily guaranteed.
The crypto market is shaky right now, and nobody knows for certain what will happen. Just how likely is it that prices will recover? Here’s what you need to know.
1. Factors contributing to the recent crypto crash
Whenever any investment or sector starts to decline, it helps to look at the big picture. This can determine whether the sell-off is due to the specific investment itself, or if there are larger factors at play.
In the case of crypto, much of the sector’s decline is related to the Federal Reserve’s recent announcement that it plans to hike interest rates and roll back stimulus measures intended to boost the economy.
During periods of economic uncertainty, investors tend to move away from risky investments and put their money behind safer options like bonds or blue chip stocks. While this doesn’t bode well for crypto in the short term, it’s not necessarily a bad thing.
Cryptocurrency is a long-term investment, and the current uncertainty won’t last forever. At some point, investors will be more willing to take on risk, and there will likely be a renewed interest in crypto.
2. Crypto has a long history of extreme volatility
Although the crypto sector has seen unprecedented growth over the last couple of years, it’s no stranger to volatility. In fact, compared to previous downturns, this recent slump is mild.
For instance, the price of Bitcoin (CRYPTO:BTC) has fallen by more than 80% on multiple occasions since 2013. In 2021, Ethereum (CRYPTO:ETH) plummeted by nearly 54% in a matter of weeks. And back in 2018, Ethereum lost close to 95% of its value over the course of the year.
Downturns can be intimidating, but major players in the crypto sector have weathered some severe storms and come out the other side even stronger.
3. Crypto is speculative
While it seems promising that the crypto market will be able to recover from this slump, it’s important to remember that there are never any guarantees. Cryptocurrency does have a strong history of surviving volatility, but past performance doesn’t necessarily equate to future returns.
Cryptocurrency is still a speculative investment, and nobody knows for certain how it will perform over the long run. Even if prices do bounce back soon, that doesn’t necessarily mean they will continue climbing long term.
This isn’t to say you shouldn’t invest. But it is important to consider your tolerance for risk before buying. Right now can be a smart opportunity to buy if crypto does rebound, but it’s also important to consider the possibility that prices could continue falling.
Cryptocurrency can be a potentially lucrative investment, but it’s also high-risk and not for everyone. While there is a good chance prices will bounce back, there are no guarantees. If you’re willing to take that risk, it may be smart to invest now. Otherwise, there may be other investments that are a better fit.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.