By Nick Saponaro, CEO of decentralized payment ecosystem, Divi Labs
The cryptocurrency market has taken a beating recently. At its worst point, approximately $1 trillion had been wiped off crypto’s total market cap, Bitcoin (BTC) had lost around 50% of its value compared to its all-time highs in 2021, and altcoins had been hit just as hard, if not harder.
For an industry that enjoyed an unprecedented year of trading and growth in the last year, the present and potentially the future were looking particularly grim. Is this the end for crypto? Has BTC reneged on its promise? The doomsayers will say so and crypto’s critics will say I told you so. But, are they right?
In a word, no. Pull back and the recent dip is part of a natural pattern of growth and decline the crypto market has experienced since its inception in 2009. This is already being borne out. At the time of writing, there were already signs of a market rally.
However, taking a more long-term view will show that when compared to other investments, crypto and Bitcoin, in particular, have led the way in terms of appreciation and returns delivered. Millionaires have been made in a relatively short period of time.
That’s not to say that people haven’t been hurt by the dip. They have. Nor that some important lessons could and should be learned from the recent crash. To be fair, these are lessons that experienced crypto investors have already gained from the ups and downs of the market and they have the scars to prove it.
However, for newer entrants, especially retail investors, who were brought into the space by the hype of last year, the crash will be particularly concerning. In sharp contrast to their dreams of riches, many will have bought when the industry peaked and will now be counting their losses.
Volatility, the likes of which we see in the crypto space, is nothing new to fledgling markets. In these environments, the promise of great gains should always be countenanced with the high probability of sharp falls. However, with the right mindset and behavior, anyone can mitigate the worst impact of a deep dip and set themselves up for future success.
To understand how we must first look at what caused the crash.
Why the market crashed
Crypto, like all financial markets, is affected by market sentiment, which is typically the product of macro events and microeconomic factors. And that is exactly what we are seeing here.
More than ever, BTC is tracking the S&P 500 and what we are experiencing is a strong correlation between the two. Macro events are particularly relevant. There’s the stand-off between Russia and Ukraine, where some sort of intervention is looking more likely, should the situation escalate further. Add to that the historic rise in inflation and the Federal Reserve indicating there will be multiple interest rate hikes in 2022 to deal with it.
Bring all of these things together and you have a perfect storm of vectors impacting negatively on market sentiment. The stock market has taken a dive as a result and with it, the price of Bitcoin has also declined.
In addition, everything in the crypto market was heavily oversold, which typically results in a bounce, as prices inflate and large holders look to take profits. However, what’s not clear is the kind of bounce we are seeing. It could be a dead cat bounce - a short-term dip that quickly rallies. Or we could be entering a true bear market, like the one last seen in 2018. The next few weeks will be a telling sign.
Cause for concern?
Despite the fall in prices, nothing has fundamentally changed about the crypto macroeconomic thesis. It’s primarily two years of a bull market that sees it trending upwards. Followed by a dip. This is how markets work. At some point bubbles burst, the market corrects and is set up for another upward trend.
We’ve seen this happen to Bitcoin multiple times in the past. We are currently towards the end of a large cycle as well as a bubble of all things. Look at stocks and real estate. Everything has been trending upwards as a result of a multitude of factors and now we are seeing a correction.
Once these correlations have settled themselves out, history shows that we will start to see everything starting to trend upward again.
The rate of invention and innovation also continues apace, which is an excellent indicator of the robustness of the market and the long-term prospects of the industry. Hard cash was replaced by plastic. Plastic by e-commerce. The next evolutionary step for finance is digital money and the blockchain. None of this has changed.
Personally, I don’t think there’s a need for concern. Short-term, there is going to be volatility. However, as the market matures, that volatility will lessen. For now, when you understand how the market behaves and have the right mindset, you can orient your own behaviors to ensure you get the best outcome.
Making sense of the crypto crash
Remember that in the markets someone has to win and someone has to lose. To win, you have to ensure you’re in the best position possible. Here are five things to keep in mind when investing in crypto.
1. Monitor the macroeconomic trends
The macroeconomic trends are clearly having an impact but as long as you keep an eye on them and act accordingly, you will be able to optimize your position. Stablecoins offer a safe haven for those who want to sit on the sidelines during times of choppy trading, earn moderate yield, or for those who just want to transact with stability on-chain.
2. Follow onchain metrics
Onchain metrics are another barometer of sentiment you should be following closely. Prior to the recent downturn, we saw huge inflows of BTC into exchanges and open interest on margin. Of course, leveraged longs were liquidated to the nth degree. You want to be watching all of these various trends to ensure that you are making the right decisions for your portfolio.
3. Dollar cost average
If you’re a retail investor, keep dollar-cost averaging into your position. Average out as the prices go down. Prices should bounce back at some point but don’t expect BTC to rebound all the way to $60K right away.
4. Get into yield bearing assets
Another thing you can do is to get into yield-bearing assets. Stake your stables and your crypto assets. Staking is when a coin holder locks up a portion of their currency for a period of time as a way of participating in the consensus of a blockchain network. In exchange, stakers earn rewards, in the form of additional coins. Assets that generate yield will help to mitigate the market volatility we’re seeing right now.
5. Leave emotion at the door
Easier said than done but it’s important that you don’t get emotional. It’s easy to get caught up in a fantasy of riches when the market is going up and not take profits at the optimal time. It’s just as easy to get caught up in the funk of a dip and exit out of fear, potentially robbing yourself of your stake and future profits.
Taking profits at local tops, setting personal goals for your portfolio, and keeping a stack of liquid stablecoin ready to nibble at dips are all good measures you can take to prepare for bearish trends in the market. Establish your entry and exit strategy. Know when you are going to get in and out of the market.
Get educated
If anything, the crash is a reminder of what a cruel mistress the markets can be. Crypto may be the newest entrant and for some, the most exciting opportunity in a generation but it still behaves like every other market.
Getting a good education is essential for making the right decisions. Don’t rely solely on what you are reading and hearing on social media. Do your own research and ensure you have a plan, and then stick rigorously to it.
About the author:
Nick Saponaro is the co-founder and CEO of the Divi Project, a decentralized payment ecosystem that's on a mission to improve people’s lives by making crypto easy and accelerating its mainstream adoption.
A dedicated proponent of the founding principles of the crypto movement, Nick is working towards the delivery of a new paradigm for financial services. One that is truly decentralized, accessible to all, and works for everyone.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.