​​Invest: How should investors react to cryptocurrency volatility

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Everything plummeted this Friday, including Bitcoin, which went down more than 10%.

Multiple pronounced drops in Bitcoin’s price the last couple weeks represent a pronounced decline from the high it set on Nov. 10 when it went over $68,000. It follows President Joe Biden signing a $1.2 trillion infrastructure bill last week. The new legislation contains a couple key provisions that could impact the tax ramifications for crypto investors.

Even after falling back from its latest all-time high price last week, Bitcoin’s current price still represents a big upswing from the low $40,000 range seen in September.

Shortly after Bitcoin’s latest all-time high last week, Ethereum marked its own new all-time high last month when its price went over $4,400. Ethereum, too, has seen a pronounced drop since last week.

Earlier this year, previous sudden drops followed a ban on cryptocurrency transactions and mining from China’s central bank, which in September declared all cryptocurrencies illegal in the country. After previously topping $52,000 in early September, Bitcoin’s price had dropped and struggled to get back over $50,000 until October.

Even with its recent and usual ups and downs, Bitcoin has mostly been on the rise following a drop under $30,000 in July.

Bitcoin first hit a high of more than $60,000 in April, and the ups and downs since then highlight the cryptocurrency’s volatility in a time when more and more people are interested in getting in on the action. In the weeks between the most recent July low point and its high points in recent weeks, Bitcoin has risen steadily. Again, Bitcoin is very volatile, so these ups and downs are par for the course.

Investing in cryptocurrencies is tricky. You have a high chance of losing it all, but a small chance of winning it big. My advice is to not gamble an amount that would burden your family or prevent you from achieving your goals.

So, how does this latest crash compare to previous ones, or even to regular stock market drops – and what does it mean for investors?

For those who invest in crypto for the long-term using a buy-and-hold strategy, swings like this are to be expected. Big dips are nothing to be overly worried about.

But if this type of extreme drop bothers you, you may have too much riding on your crypto investment. A healthy threshold, in my opinio, is 5% of your portfolio. You should only invest what you’re OK losing. But even if the drop is making you rethink your crypto allocations, the same advice still stands – don’t act rashly or upend your strategy too quickly. Reconsider what you might be more comfortable with going forward, such as allocating less to crypto in the future or diversifying through crypto-related stocks and block hain funds rather than directly buying crypto (though you should still expect volatility when cryptocurrency markets fluctuate).

One strategy – don’t check on it – is said to be the best thing to do in times of fluctuation. If you let your emotions get too much into it then you might sell at the wrong time, make the wrong decision.

So with that out of the way, let’s discuss what’s behind the latest Bitcoin drop?

I believe there are 2 reasons in play, 

  1. A new regulatory action by the U.S. government, as well as the new legislation pertaining to crypto in the infrastructure bill. In an industry as new and unproven as cryptocurrency, it doesn’t take much to drive big swings in price. More generally, new short-term investors who are selling their holdings in reaction to the latest drop may be contributing to the drop in Bitcoin’s value.
  2. A new type of COVID-19 variant was found in South Africa. Similar to the discovery of the delta variant, investors are suspecting that this variant will kick us right back to guarantee, and therefore hinder economic recovery.

In summary, the moment you start investing in cryptocurrencies, you should be prepared for this kind of “big swings”. The important thing to do here is to not panic sell.