Cryptocurrency as a whole is volatile. The prices soar and crash quickly, all while sentiment and fundamental developments are factored into the market.
In early June, Bitcoin fell from $30,500 to $23,500 in just four days. That is a decline of almost 23%. Over the same time, Ethereum crashed by more than 31%, and the entire crypto market sank in 2022, according to NerdWallet.
What to Do When Crypto Crashes?
The market volatility attracts traders looking to make a profit, but it is nerve-wracking, especially for new investors looking to get started.
Traders can expect more volatility in the future as new cryptocurrencies emerge and others crash. What should you do with this type of uncertainty to manage the risk?
Act with a Cool Head
Whatever you decide to do with your cryptocurrency, you need to stay calm. If you make an emotional decision, it rarely results in anything good happening.
Before you rush into the market, you must reflect on why you are trading crypto. It can be because you are investing. After all, you want the long-term opportunity, or you want to make a quick buck on short-term trading.
Whatever your reasoning is, you will want to act in accordance with your goals. If you believe in long-term opportunities, it is best to think with that mindset. If you want to make a quick trade, then you can think with that mindset.
Check the Situation
Every now and then, you will hear the news that shifts the market's sentiment. Actual developments in the crypto market can hurt its prices, according to BankRate.
China's ban on financial institutions from providing crypto-related services caused a clampdown since the country banned crypto exchanges back in 2017. However, it has not banned people from owning cryptocurrencies.
In late 2021, the Federal Reserve decided to reduce liquidity in the financial system, and many cryptos have been on a downturn in 2022, according to The Conversation.
In May, TerraUSB crashed as traders engaged in a bank run because they feared it did not have the crypto assets to back its peg to the dollar. This news spread in the crypto market as traders worried that selling would cause a domino effect.
These are just some moves that had significant blows to the market, which had significant capital inflows.
Volatility is Always There
Cryptocurrency is volatile by nature because it generates no cash flow, and traders have to rely on changes in sentiment in order to drive its price.
The market can go from being optimistic in early 2021 to pessimistic in early 2022. The furor around Coinbase IPO in 2021 drove positive sentiment to crypto, while the reduction in monetary stimulus drove pessimism at the end of 2021 and the beginning of 2022.
When you have an asset that is driven by sentiment, the emotions of traders propel the crypto market. It is true, especially in the case of stocks, but they also have a real stream of growing cash flows from their issuing company to push them higher.
Related Article: China Causes Cryptocurrency Market Crash, Affects Ethereum, Dogecoin, Leading Crypto and MORE Due to Restrictions
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Written by Sophie Webster
