CRYPTO PRICES ARE EXTREMELY VOLATILE
If there’s one word to describe Bitcoin and cryptocurrency, it’s volatility. Tax Crypto prices seem to rise and then crash in quick succession, as rumors, sentiment and fundamental changes quickly feed into the market. Although TerraUSD appears to be reliable, concerns about its solvency are quickly growing, and the Treasury Department has cited the dangers cryptocurrencies can pose to the broader economy, calling for stricter regulation.
For example, Bitcoin skyrocketed to $69,000 in November 2021. But less than three months later, the cryptocurrency has lost almost half of its value, falling to around $35,000.
This volatility is attractive to traders looking to make a profit, but it’s also nerve-wracking, especially for new investors. Traders can expect more of this volatility in the future as new cryptocurrencies emerge and others fall by the wayside.
With cryptocurrency so volatile, what should investors do to manage their risk?
5 actions when cryptograms are reduced
Afraid to take the plunge in hopes of getting a bargain? Anyway, here are five things that happen when cryptocurrency prices crash.
1. Be calm
Whether you want to sell cryptocurrency or view it as an opportunity to buy more, you need to act with a cool head. Making emotional decisions, especially when it comes to trading, rarely leads to great results. So, before you rush into the market in a panic, you may want to think about why you are trading crypto.
Are you investing because you believe in long-term opportunity?
Or are you here to make a quick buck in short-term trading?
The answers to these questions with help of expert crypto tax reporting can help you make the right decision. Either way, you’ll want to work on your goals. In other words, if you believe in long-term opportunity, think with this mindset. If you are here for a quick trade, consider this point.
2. Assess the situation
Is there any news driving the trading price of Bitcoin and other cryptocurrencies? There is likely to be major news that has changed market sentiment, and it’s not just price action or bullish sentiment.
Actual changes in 2021 hurt prices. China’s move to ban financial institutions from providing crypto-related services is a further crackdown, as the country banned crypto exchanges in 2017, but has not banned people from owning cryptocurrencies. Then at the end of 2021, the Federal Reserve decided to reduce liquidity in the financial system, and many cryptocurrencies fell significantly until 2022.
In May 2022, TerraUSD stablecoin traders started doing the old “banking” because they fear that it has no crypto assets. The news has spread to other crypto markets as traders fear that the sell-off will lead to more sell-offs.
As such, the moves came as a further blow to a growing market that has been enjoying huge capital inflows.
3. Remember, flexibility is the name of the game
Cryptocurrency is volatile by nature. Since crypto does not generate cash flow, traders must rely on sentiment changes to drive the price up. This means that the market can turn between frantic optimism, as in 2021, to pessimistic pessimism a few months later. In 2021, the frenzy surrounding the Coinbase IPO helped spark positive sentiment in crypto, while the waning of monetary stimulus fueled pessimism in late 2021 and early 2022.
This means that when you have an asset that evokes emotion, traders’ emotions drive the market. This is also true of stocks, but they can also have real cash flow growth from the issuing company to accelerate them.
This volatility attracts professional traders, who use high-powered algorithms to make complex trades that “mom and pop” traders typically don’t have the advantage of using. Traders love volatility because it allows them to make money—that’s the game of Wall Street.
4. Assess the future
Analyze how the key situation plays out for crypto in light of the new developments: Will governments crack down on it? Will they adopt it more widely? Will the new regulations help the cryptocurrency market without disrupting it? What else could drive the market?
Is China’s move to ban crypto news to come? Maybe. India had floated the idea of banning cryptocurrency, and Russia’s central bank had also voted against it. But other countries, including the United States, are exploring how to regulate cryptocurrency rather than outright ban it. A couple of countries, namely El Salvador and the Central African Republic, have even made it legal tender.
It remains to be seen how other major countries fare, but that’s clear
