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Cryptocurrencies have taken a beating over the past few weeks, with several of the biggest names in crypto plummeting. The price of Bitcoin (CRYPTO: BTC) is down nearly 50% since April, Ethereum (CRYPTO: ETH) has dropped by around 53% since May, and Dogecoin (CRYPTO: DOGE) has plunged close to 60% over the past six weeks.
Stock market downturns are always nerve-wracking. But even the most volatile stocks don’t often fall as fast or hard as cryptocurrencies.
If you’ve 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. One contributing factor was Elon Musk’s announcement back in May that Tesla would no longer accept Bitcoin as a form of payment.
Then China began cracking down on cryptocurrency mining, resulting in crypto prices plummeting even further. The IRS then revealed that it was getting more stringent about collecting taxes on cryptocurrencies, which may have contributed to the crypto crash, as well.
Cryptocurrencies are also volatile, simply because they’re highly speculative and many investors are still on the fence about them. Nobody knows whether cryptocurrency will still exist in a few decades, and when prices start to fall, nervous investors are more likely to panic-sell — causing prices to drop even more.
Should you worry right now?
Although this most recent crash can be intimidating, the good news is that this is nothing new for cryptocurrencies. Bitcoin has lost more than 80% of its value on multiple occasions, and it’s always bounced back. Ethereum even lost nearly 95% of its value back in 2018, yet it was able to recover.
While past performance doesn’t 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 doesn’t guarantee they’ll always recover, but both of these cryptocurrencies have seen worse and were still able to survive.
Bitcoin Price data by YCharts.
As with any investment, the key to building wealth is to hold your investments for the long term. Cryptocurrency is still finding its footing, and if it does succeed, it could take years or even 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 should be willing to hold onto your investments for as long as possible — regardless of whatever volatility they may experience in the short term.
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’s performing right now.
How to protect your money
If you do invest in cryptocurrency, it’s important to make sure you’re investing wisely. Cryptocurrency is so speculative and risky right now, there’s a chance you could lose any money you invest.
For that reason, only invest money you can afford to lose. Think about how much you’re comfortable losing, too. Even if you can afford to invest thousands of dollars, for example, if you know you’d lose sleep over losing that much money, you may want to scale back your investments. If you’re not comfortable losing any money, it’s probably best to avoid cryptocurrency altogether.
Cryptocurrency isn’t the right investment for everyone, and it’s best suited to those with a higher tolerance for risk. Volatility comes with the territory when investing in cryptocurrency. But if you believe in its potential and are willing to hold your investments for years or even decades, it could pay off down the road.
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Katie Brockman owns shares of Bitcoin and Ethereum. The Motley Fool owns shares of and recommends Bitcoin and Tesla. The Motley Fool has a disclosure policy.
