Crypto investors beware: Experts say there could be at least one more big crypto crash on the horizon.
Though bitcoin and other cryptocurrencies have been trending up in recent days, the crypto market isn’t out of the danger zone yet. The two largest cryptos — bitcoin and ethereum — are still sitting nearly 50% below their all-time highs in November.
In fact, bitcoin has fallen below $20,000 several times in recent weeks, a price point that remains pivotal as experts debate whether it will see further declines akin to 2013 and 2017, when it tumbled 85% below its high. Ethereum, the second most valuable digital currency, has seen more gains than bitcoin over the last few days and was trading above $1,500 on Tuesday.
The crypto market could still experience one more drastic sell-off before it’s on the road to recovery, says Edward Moya, a senior market analyst at brokerage firm OANDA — with bitcoin dropping close to $10,000. He says the next two weeks will help determine whether bitcoin’s price has bottomed out yet. Ethereum is still at risk of falling as low as $750, an additional 50% decrease from the current price, says crypto expert Wendy O.
“We’re in a full-blown bear market, not a bear cycle. Just because we see some positive price action doesn’t mean we’re out of the clear,” O says. “We’re currently trading at $1,500 [for ethereum], and in order for me to be super bullish on ethereum, I would need to see us break above $2,248. That’s a 50% price pump right there.”
Will There Be Another Crypto Crash?
Plenty of experts say another crypto winter is already setting in. Between a collapse in the market, layoffs, and the ongoing liquidity crisis in the crypto industry, experts says crypto prices will likely remain low for the foreseeable future, such as they did in between early 2018 and mid-2020.
And while some experts say we’ve hit the bottom, many experts also say crypto prices will likely drop even further in the coming weeks or months. They point to what past bear markets have looked like for crypto — which experienced 85% corrections from all-time highs — and fresh concerns that the macroeconomic environment could get worse going forward.
Additionally, crypto companies have laid off staff, frozen withdrawals, and tried to mitigate losses, raising questions about the health of the industry. It started with the implosion of Terraform Labs in May, but the crypto bear market has effected other firms since. Coinbase, the largest crypto exchange in the U.S., announced in June it was cutting 18% of its employees, after layoffs at other crypto companies like Gemini, BlockFi, and Crypto.com. Crypto bank Celsius abruptly halted withdrawals in recent weeks due to “extreme market conditions,” and crypto hedge fund Three Arrows Capital may be facing liquidation.
Alarm bells went off in particular recently after bitcoin dropped below $19,700. Crypto expert and educator Wendy O says if that happens again, bitcoin could potentially fall below $17,600 and “it’ll get scary.”
What Investors Can Do to Prepare
The crypto market has crashed before, and it will likely crash again so it’s important to be ready. Cryptocurrencies are notoriously volatile and risky, so investors can see market swings of more than 50% in a matter of months and as much as 15% price gains within 24 hours.
In moments of extreme volatility and uncertainty in the crypto market, here are things you can do to protect your finances:
1. Prioritize Your Budget, Debt, and Savings
Before investing in crypto, make sure you feel confident about your budget, debt, and savings. Having a solid budget and emergency fund can give you the reassurance to know you can still meet your financial goals and help relieve any stress you may be feeling toward your investments.
The amount you should have saved in an emergency fund — cash in an accessible high-yield savings account — is open to debate, but most experts say at least 3 months of expenses is a good starting point. If you don’t yet have a well-stocked emergency fund, don’t buy crypto and instead start putting a small amount aside each month until you do. Along with an emergency fund, experts say you should have a conventional retirement savings strategy in place and should carry no high-interest debt.
2. Diversify Your Investments
It’s a good idea to take some steps to safeguard your investments from the whims of the market. The best way to do that is to diversify what you invest in. Crypto should only take up a small portion of your overall portfolio of stocks, bonds and mutual funds to help you achieve your long-term financial goals.
If you’re thinking about investing in crypto, experts say now could be a good time to get in the market while prices are low, but keep in mind that prices could fall even more. In terms of which cryptos you should invest in, the majority of experts recommend sticking to the most established cryptocurrencies: bitcoin and ethereum.
3. Invest What You’re OK With Losing
You should have a high risk tolerance to invest in crypto, and you should only invest an amount that you’re OK with losing. Experts suggest following the 5% rule — that is, don’t contribute more than 5% of your portfolio to risky assets like crypto. As with any new investment, it’s important to do your research and understand all of the risks associated with cryptocurrencies.