As we know, this year, cryptocurrencies face many crises. In May 2022, the cryptocurrencies like Terra USD and LUNA failed, followed by the failure of several crypto sites. In addition, the exchanges FTX and FTX.US filed for Chapter 11 bankruptcy on November 11, 2022. The aftermath of the collision remains ongoing. As a result, increasing interest rates have led to price declines. Thus, do you know what should be done when digital assets such as Bitcoin collapse? Here are five steps that can help you to manage your digital assets.
List of Contents
Causes of Cryptocurrencies Collapse
As we know, most crypto events, such as exchanges or currencies failing, can significantly impact cryptocurrency values. They can also decline due to rising interest rates, inflation, and other macroeconomic variables that impair investor confidence in riskier alternative assets.
Significantly, when prices fall fast, as this year, this can add to market pressure by compelling some investors to liquidate assets to pay their commitments. In the instance of the FTX disaster, the market was severely affected. The crash affected not just FTX but also cryptocurrency FTX substantially invested in band companies with which FTX conducted business. The cryptocurrency exchange BlockFi, which had secured a credit line from FTX.US and was scheduled to be bought by the firm later in the year, blocked withdrawals and sought bankruptcy counsel.
5 Steps to Follow When Cryptocurrencies Collapse
Are you worried about a drop or excited about the potential of a lower price? In any case, here are five things you should do if cryptocurrency prices fall.
1. Analyze the circumstances
Genuinely, actual developments have a negative impact on pricing in 2021. China’s decision to prevent financial institutions from offering crypto-related services was a further crackdown. This is because the nation had already barred crypto exchanges in 2017, but not people from possessing cryptocurrency. The Federal Reserve then chose to limit liquidity in the banking sector late in 2021, and several cryptos have been on a substantial slump far into 2022.
Moreover, in May 2022, the stable coin, Terra USD fell as speculators engaged in a classic bank run, fearing that it lacked the crypto assets to back its dollar peg. This news spread to other cryptocurrency exchanges, as traders were concerned that selling would lead to additional selling. As a result, these actions have dealt another substantial blow to the expanding market, which had received large capital inflows.
2. Try to remain calm
Whether you decide to sell your cryptocurrencies or view a price decline as a buying opportunity, you must operate with a level mind. It would help if you made emotional judgments, especially while trading, rarely ending in favorable outcomes. Moreover, before rushing into the market, you should consider why you are trading cryptocurrencies in the first place. Do you invest because you believe in the opportunity’s long-term potential? Are you here to get a fast profit through short-term trading? The answers to these questions can help you make the right choice. In each circumstance, you should act according to your objectives. In other words, adopt this mentality if you believe in the long-term possibility. If you are here for a speedy transaction, keep this in mind.
3. Figure out what to do
After calming down and assessing the circumstance, you should figure out your next steps.
- Are the hazards disguised as opportunities?
If so, you may choose to maintain your position or take advantage of a price decline to invest more.
- Are the dangers likely to endure or possibly intensify?
If so, you may wish to cut your losses and avoid gambling in the future.
- Is the circumstance too uncertain?
If the future is unclear, consider selling a portion of your stake now while retaining the possibility for gains tomorrow.
Regardless of your decision, you will need an action plan representing your assessment of the dangers and possibilities of cryptocurrencies. However, it is important to note that some of the world’s most astute investors refuse to invest in cryptocurrencies and strongly advise you to avoid them.
4. Assess the future
Assess how the underlying circumstances for crypto may evolve in light of recent developments: Will governments become more stringent? Will they promote its wider adoption? Will new restrictions aid the bitcoin business rather than damage it? What else may influence the market? Is China’s decision to prohibit cryptocurrencies a portent of things to come? Nevertheless, some nations, notably the United States, are researching ways to regulate cryptocurrencies rather than outright outlawing them. Several nations, like El Salvador and the Central African Republic, have proclaimed it a legal tender.
It remains to be seen how other large nations will move. However, cryptocurrencies face significant regulatory risks, including regulations that might drive them out of business. As cryptocurrency grows in popularity, it risks falling prey to its own success. The use of cryptography in ransomware campaigns and other criminal operations is counterproductive.
Therefore, it is possible that the utopian aspirations of crypto proponents may be eliminated by legislation. Political ramifications are only one aspect of their destiny. In addition to the monetary and environmental expenses of “mining” cryptocurrencies, crypto confronts other important obstacles.
5. Keep in mind that volatility defines the game
It would help if you remembered that cryptocurrency is fundamentally volatile. Since cryptocurrencies do not create cash flow, traders must rely on mood changes to determine the price. This implies the market can fluctuate between extreme optimism, as it did at the beginning of 2021. In 2021, Coinbase’s IPO commotion contributed to a favorable feeling toward cryptocurrencies. However, the decline in monetary stimulation contributed to pessimism at the end of 2021 and the beginning of 2022. When an asset is sentiment-driven, the market is driven by the emotions of traders. This is likewise true in the case of stocks, but they may also be supported by an increasing cash flow source from their issuing firm. This volatility is what attracts professional traders who employ powerful algorithms to execute complex deals. This is Wall Street’s game. Traders enjoy volatility since it affords them opportunities to profit.
Alternative Options to Cryptocurrency
Cryptocurrencies are very volatile and speculative, and many investors hesitate to invest much. The good news for investors is that there are cryptocurrency alternatives that provide long-term solid returns as follows:
REITs
If you want a strong cash distribution, REITs are an option to dividend stocks. REITs own and operate real estate and have a strong track record of long-term gains. You can even purchase a fund rather than individual REITs.
Dividend stocks
Dividend stocks can be purchased if you want a cash distribution as part of your investment. These are less volatile than stocks in general.
Individual stocks
If you are prepared to research and keep an eye on the firm, you may make a lot of money by investing in individual stocks like Amazon or Apple.
Index funds
An index fund is a decent option if you don’t want to undertake the legwork of selecting particular stocks but still want strong returns. An index fund invests in stocks or other assets to track a specified group of stocks, such as the S&P 500.
Conclusion
In summary, a drop in the cryptocurrency markets may have you worried. However, you can use it as a wake-up call to reconsider why you are in the market in the first place. Bitcoin, for example, has recovered well following the last significant dips. There is still no assurance that it will do so again, especially if it faces severe existential problems as nations prohibit its usage and, potentially, ownership. Moreover, it is the type of genuine danger that may kill or profit an investment if the reality is less severe than anticipated.
FAQs
Cryptocurrencies can collapse when the currencies change or fail, and there are other things that can cause this to happen, such as macroeconomic factors, alternative assets, rising interest rates, and inflation.
Recently, the state of the cryptocurrency market has been uncertain because it will change constantly.
Yes, the blizzard of class-action lawsuits is prepared to respond to the cryptocurrency collapse.
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Source: Nerdwallet, Bankrate