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Cryptocurrencies have taken a hit in recent weeks, with several of the biggest names in crypto plummeting. The price of Bitcoin (CRYPTO: BTC) has fallen almost 50% since April, Ethereum (CRYPTO: ETH) has fallen around 53% since May, and Dogecoin (CRYPTO: DOGE) has plunged almost 60% over the course of for the past six weeks.
Dips in the stock market are always nerve-racking. But even the most volatile stocks don’t often fall as fast or as hard as cryptocurrencies.
If you have invested (or are considering investing) in the crypto market, should you be worried about the most recent crash? Here’s what you need to know.
Image source: Getty Images.
Why is crypto crashing?
Cryptocurrencies have always been a volatile investment, and it doesn’t take much to trigger a downturn. A contributing factor was Elon Musk’s announcement last May that Tesla would no longer accept Bitcoin as a payment method.
Then China started cracking down on cryptocurrency mining, causing crypto prices to fall even further. The IRS then revealed that it was getting stricter on collecting taxes on cryptocurrencies, which may also have contributed to the crypto crash.
Cryptocurrencies are also volatile, simply because they are highly speculative and many investors are always on guard. No one knows if the cryptocurrency will still exist in a few decades, and when prices start to drop nervous investors are more likely to panic, causing prices to fall even further.
Should we worry now?
While this most recent crash can be intimidating, the good news is that it’s not new to cryptocurrencies. Bitcoin has lost over 80% of its value on several occasions, and it has always rebounded. Ethereum even lost almost 95% of its value in 2018, but it was able to recover.
While past performance does not predict future returns, history has shown that the biggest names in the crypto space – namely Bitcoin and Ethereum – have been able to withstand volatility. Again, this does not guarantee that they will always recover, but these two cryptocurrencies have seen worse and have always been able to survive.
Bitcoin price data by YCharts.
As with any investment, the key to building wealth is to hold onto your investments for the long term. Cryptocurrency still finds its place, and if it succeeds, it could take years, if not decades, to become mainstream.
The best reason to invest in cryptocurrency is if you truly believe in its long term potential. If you think it has a bright future, you need to be prepared to hold your investments for as long as possible, no matter how volatile they may be in the short term.
The cryptocurrency will likely experience many more crashes over the years. As long as you stay focused on its long-term potential, it doesn’t necessarily matter how it currently performs.
How to protect your money
If you are investing in cryptocurrency, it is important to make sure that you are investing wisely. Cryptocurrency is so speculative and risky right now that you could lose the money you invest.
For this reason, only invest the money that you can afford to lose. Also think about how comfortable you are with losing. Even though you can afford to invest thousands of dollars, for example, if you know you would lose sleep by losing so much money, you might want to cut back on your investments. If you’re not comfortable losing money, it’s probably best to avoid cryptocurrency altogether.
Cryptocurrency is not the right investment for everyone, and it is best suited for those with a higher tolerance for risk. Volatility comes with territory when investing in cryptocurrency. But if you believe in its potential and are willing to hold onto your investments for years, if not decades, it could pay off.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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