Cryptocurrency plunge: Should you ‘buy the dip’ or avoid exposure?

Cryptocurrency plunge: Should you ‘buy the dip’ or avoid exposure?

The cryptocurrency market has been witnessing widespread turbulence since the start of this week and Wednesday’s broad-based plunge that sent all cryptos into a tailspin has made investors nervous.

While prices of some popular cryptocurrencies like Bitcoin and Ethereum (Ether) staged a comeback on Thursday after the crash, the overall crypto market remains extremely volatile at the moment.

Most analysts have said that it is not a good time to invest in cryptocurrencies, considering the high volatility that has battered valuations at the moment. However, some analysts think it may not be a bad idea to buy the dip, given Thursday's rapid rebound.

The crash has triggered heavy selling in the cryptocurrency market as investors look to offload their holdings and minimise losses amid the ongoing uncertainty. At the same time, some people have expressed a desire to “buy the dip”, hoping for a rebound in the near future.

On Wednesday, the two main digital currencies Bitcoin and Ethereum (Ether) fell as much as 30 per cent and 45 per cent respectively. But both virtual coins have pared losses significantly after Tesla Inc Chief Elon Musk and Ark Invest’s CEO Cathie Wood indicated their support for Bitcoin.

Incidentally, it was a series of tweets by Elon Musk that was responsible for the crash in the first place. Bitcoin, the most popular cryptocurrency, has been under pressure since last week after a series of tweets from Musk, where he said Tesla will not accept Bitcoin as payment.

Musk highlighted the heavy environmental toll of mining Bitcoin, which requires a lot of electricity to power the computers that create Bitcoin.

However, it was Musk’s tweet again that helped in the recovery of Bitcoin prices after prices started plunging sharply on Wednesday.

Elon Musk tweeted a ‘diamond hands’ emoji, used in social media to signal holding on to a position. His tweet was aimed at Bitcoin investors.

While his tweet did help stop Wednesday’s broad-based rout, the fact that commentary from a few influential people like Musk can make or break the entire cryptocurrency market within a day is a fairly risky prospect, according to analysts.

Though the main reason for Wednesday’s trigger was China’s move to tighten crypto regulations, analysts indicate that cryptocurrency investments still remain unsustainable due to high volatility among investors. And the losses, especially in the case of a dip in Bitcoin and Ethereum — are huge.

At one point on Wednesday, nearly $1 trillion was wiped off the market capitalisation of the entire cryptocurrency market. This is no less than a nightmare for traditional investors, who value long-term growth and security over adrenaline-driven trade.

At the same time, the recent boom in cryptos indicates that it can make investors seriously rich in a short time if they understand the trends well. However, investing in cryptos is much riskier than traditional assets.

It depends totally on whether you are ready to take the risk. In case you are looking for a safe, long-term investment option, cryptocurrency may not be your preferred choice of investment, given the high volatility and risk factor.

But if you have an appetite for risk and have the financial backing to invest in cryptocurrencies, it could be right up your alley. The returns will be much higher than traditional investments if you stay on top of daily trends, but you should also be ready for frequent bouts of extreme volatility.

The key is to remain patient and no let go of your investments in case of rising uncertainty. People interested in crypto investments should also look at diversifying their portfolio and looking for long-term options like Ethereum, predicted to be the next big virtual coin in the market.

Analysts also said that those who have been spooked by Bitcoin’s sharp fall — it has dropped some 40 per cent from a record high of $64,895 on April 14 to around $40,000 on May 20 — over the past few months.

Gavin Smith, CEO of crypto consortium Panxora, told Reuters that Bitcoin’s sharp price drop should come as o shock to the market. "Any asset which has risen as much as bitcoin over the past year can be expected to have pullbacks as some investors withdraw profits like we're currently seeing,” he said.

In conclusion, the recent uncertainty in the crypto market has been triggered by a barrage of unpleasant announcements — from Elon Musk’s tweet to China crackdown and investigations against crypto trading platforms like Binance.

Analysts tracking the cryptocurrency market predict that Bitcoin could fall further, but it is unlikely to dip below $30,000.

This could trigger a short-term fall in other cryptos as well, but the virtual coin market is likely to rebound again as it gains wider mainstream acceptance amid the rising demand for blockchain technology across the globe.

However, people who are looking to invest in cryptocurrencies should always be prepared to deal with large price swings as they are the riskiest assets one could invest in at the moment.