BITCOIN and other top cryptocurrencies can easily go up as well as down.
The world’s biggest digital coin may be popular, but it’s also very risky to invest unless you know exactly what you’re doing.
Bitcoin, the number one cryptocurrency is trading at £16,541.24 at the time of writing according to Coinmarketcap.
The other major players including ethereum, Binance coin, solana, cardano and Ripple’s XRP which have experience drops and increases too.
If you’re thinking of investing, keep in mind it’s a risky business and you’re not guaranteed to make money.
You need to make sure you know the risks and can afford to lose the cash, and never invest in something you don’t understand.
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Why has the cryptocurrency market crashed?
The swings in cryptocurrencies follow a volatile period for financial markets, with spiking inflation forcing central banks to tighten their monetary policy.
It may also crash when global stocks are down and assets like Treasuries rally.
There is crypto’s natural cycle where people tend to sell their assets off when they reach record highs.
When has the cryptocurrency market crashed before?
As with every currency, the market experiences its up’s and down’s, and Bitcoin and cryptocurrencies are no exception.
In 2021 the market crashed when China ramped up its clampdown on Bitcoin mining, which helped cause the last crash earlier this year.
The omicron variant also led to risk aversion over concerns about what it might mean for global economic reopening in the coming months.
November 2021
Cryptocurrency plunged for the second time in a month in November, falling 6% overnight, wiping $7,000 (£5,200) off its value within hours.
Analysts said there did not seem to be any news driving the declines, and the moves seemed driven by profit-taking after the currency hit its recent high.
November’s crash is partly driven by long-term holders selling at a high to take home profits, according to blockchain data. That’s typical following a price spike.
Five risks of crypto investments
BELOW we round up five risks of investing in cryptocurrencies.
- Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
- Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
- Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
- Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.
October 2021
Bitcoin also crashed in October this year, sending crypto traders into panic when the currency dropped by thousands of dollars in just a few minutes in what’s known as a flash crash.
The drop has wiped hundreds of billions from global cryptocurrency markets.
This crash was predicted to have been driven by the all-time high for Bitcoin when the value reached close to $67,000.
June 2021
The value of cryptocurrency plummeted into the dreaded “death cross” phase in the wake of China’s expanding crackdown on crypto-mining.
China continued its tough crackdown on mining and trading the cryptocurrency.
The country accounted for more than 60 per cent of mining and trading at the time.
May 2021
Bitcoin peaked in value on April 14, boosted by Coinbase going public but four days later, it recorded its biggest drop in two months.
Turkey’s central bank announced it would be banning cryptocurrencies for purchases and a blackout in China’s Xinjiang region, which powers a lot of Bitcoin mining, meant the coin took a further hit.
It started to rally after some mainstream businesses said they would let customers pay using more well known virtual currencies, such as PayPal.
February 2021
Several cryptocurrencies such as Bitcoin, Ether and Dogecoin tumbled the morning of February 23, by more than 10 percent.
The steep decline sent the cryptocurrency market’s total value down about 16 percent to nearly $1.4trillion just days after it soared to all-time records, according to Coinmarketcap.
On Saturday, February 20, Musk may have unknowingly kickstarted the crypto plunge with a tweet declaring that the prices of Bitcoin and Ether “seem high”.
The 2018 cryptocurrency crash
After an unprecedented boom in 2017, the price of Bitcoin fell by about 65 percent during January and February 2018, in one of biggest crashes in cryptocurrency history.
By September 2018, cryptocurrencies collapsed 80% from their peak making the crash worse than the Dot-com bubble’s 78% collapse.
By 26 November, Bitcoin also fell by over 80% from its peak, having lost almost one-third of its value in the previous week.
The bubble was supposedly burst by a number of factors, including fears around the high theft risk of cryptocurrency and long-term holders selling at a high to take home profits.
What are the risks of investing in cryptocurrencies?
It’s very important only to invest in any form of cryptocurrency if you understand it.
Remember, there’s no guarantee you can convert cryptocurrency into real cash and investing is not a reliable way to make money.
That’s because it can be highly volatile too – meaning your cash could soar or plummet at any given moment.
Online currency and decentralised finance is also very risky a lot of the time due to the prevalence of scams.
For example, just over 7,200 reports of crypto scams were made to the FCA, the UK’s finance watchdog, in the year leading up to June 30, 2022.
It marks a staggering 45% increase over the previous year, in figures obtained by Capital Block.
Common ways to get scammed are:
- fake exchanges
- fake wallets
- phishing scams
- Ponzi scams where they make unrealistic claims about returns
And keep in mind you won’t be able to take a complaint to the Financial Ombudsman Service, because cryptocurrency firms are not regulated in the way others are.
How to stay safe
There are lots of things to look out for but, most importantly if something looks too good to be true, it probably is.
Always check with a trusted friend if you’re not sure about something as well – they may be able to spot something you haven’t.
Also, don’t always trust a glowing website and perfect reviews – fraudsters can get quite smart with these things.
For more on how to avoid scams, read our guide here.