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Why are cryptos falling?

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Why are cryptos falling?

Key insights

Crypto recently experienced a dramatic drop in prices across the board cutting nearly 1 trillion dollars in total crypto market cap.

Does this mean we've been investing in tulips this whole time?

Is the bubble bursting?

I give my two Satoshis on the matter in the following article.

Crypto has been in the dog house lately.

Just from a month ago:

Bitcoin is down >30%

Ethereum is down >35%

Have we been speculating on tulips all this time and the proverbial chickens have finally come home to roost?

In order to not panic sell (or FOMO buy for that matter), it helps to understand what is going on.

Retracing our steps:

Why the drop?

The recent sell-off was sparked by a series of bad news for crypto starting with Tesla CEO Elon Musk saying the company would no longer accept Bitcoin as payment for its vehicles, citing environmental concerns.

Afterwards, news that China would attempt to prevent businesses in the country from using cryptocurrencies triggered additional sell-offs.

However this isn’t enough to explain the massive drop in crypto market cap we’ve seen across the board (nearly $1 trillion dollars has been lost in just a month).

Why this big of a drop?

The short answer is no one knows for sure.

Here are my two Satoshis though:

Cryptocurrencies owners, like with pretty much any asset, can be categorized into two distinct groups: long-term holders (Hodlers) and short-term holders (Traders).

Traders are in it for the short term gains. Trying to predict where the market is going to be in the next hour, day and week. 

When bad news hits, Traders trim their positions. 

When a string of bad news hits like what happened recently, the prospect for short-term gains all but vanishes and Traders rush the exit like a packed theatre someone yelled “fire!” in.

This dynamic becomes more acute the more leverage there is in the market. This is because even if the trader would like to ride out the downturn, the loans they owe force them to cash despite it being an inopportune time.

Sprinkle a bunch of FUD (Fear, Uncertainty and Doubt) on the situation and some of the owners that thought they were hodling for the long-term discover they have "lettuce hands" and sell.

What’s left are the people that did things right. They understood what they were buying, they bought because they were convinced with the practical merits of what they bought, and they did it with money they could afford to lose.

Keep things in perspective:

The price of Bitcoin has plummeted by roughly 80% in the past, and Ethereum once lost more than 90% of its value over the course of a year.

While the recent drops in crypto prices have been substantial, most cryptos are still up substantially from just a year ago. In the past 12 months:

Bitcoin is up > 300% 

Ethereum is up > 1,000%

Not too shabby.

Often, the price of an outperforming asset is volatility. If the merits are there, I’ll take that trade-off every time.

Disclaimer: Nothing in this article is meant to be understood as financial advice. Cryptocurrencies are highly volatile and many are scams. Invest wisely. Never invest money you can’t afford to lose.

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