It’s probably fair to say that crypto has always been considered a pretty risky bet for retail investors, especially those that just have a passing interest, don’t want to miss out on the newest shiny thing, and fail to do any research on what they were buying. Things have changed a little in the last six to twelve months, though, and predicting what might happen with the crypto market has become somewhat akin to trying to forecast the movements of the greater stock market.
So what exactly is going on, and is it a good idea to invest in crypto this year? Read on for a fuller picture, and however, you choose to invest your hard-earned capital, be sure to use a trusted and regulated broker such as easyMarkets to simply and conveniently process your trades.
1 Is crypto still a useful tool for diversification?
It used to be that cryptocurrencies were considered a fairly decent way to diversify your portfolio because they were negatively correlated to the stock market. Bitcoin, specifically, was popular for this very reason.
As it’s grown in popularity and more cryptocurrencies have hit the market over the last few years, though, the factors that impact the price of cryptos seem to have started mirroring those of the stock market and in the current economic landscape of 2022, which is certainly less than ideal.
A couple of crypto firms have filed for bankruptcy lately, and there may be more following. Forbes writes of Voyager, Celsius, and Three Arrows having fallen into Chapter 11 status, while valued suspended withdrawals in June after the downturn had led to customers fleeing the platform and an insurmountable debt load.
2 Some of the drivers of crypto prices explained
Market sentiment is having a huge impact on crypto right now. Many not-so-savvy traders have jumped on board with the once-obscure investment vehicle, and for the most part, this demographic tends to spook pretty easily, and when they do, they bolt.
Reuters reported last week that Bitcoin and Ether had recently gained 9% and 5% in value, respectively. The reason? Nothing, in particular, just a broad upbeat mood.
Inflation has been sky-high this year globally, and homeowners and borrowers are also feeling the pinch of rising interest rates as a result as well. People don’t have as much disposable income for what they perceive to be ‘risky’ investments at present. In addition, the crypto market is increasingly correlated to the most popular American indexes, such as the S&P 500 and the Nasdaq.
Right now, rampant inflation and the aggressive monetary policy from the Fed are strongly impacting the economic outlook, as risks of recession are intensifying, which triggers high market uncertainty and volatility. Not to mention that geopolitical tensions between Russia and Western countries are also adding pressure on growth prospects.
Supply and demand are other movers of prices, as the most popular crypto is famously limited in supply. In the current market, when things are particularly choppy, supply and demand can cause a spiraling effect either way.