Bitcoin's historic decline continued last month, dropping roughly 9% amid a broader selloff in financial markets. In this post, Kavan Choksi examines the factors that have resulted in the crypto crash to help investors make proper portfolio adjustments and carefully weigh future investment choices.
Raging Volatility
The Federal Reserve boosted interest rates by half a percent last month, prompting massive stock market gains. According to Edward Moya, senior market analyst at Oanda, Bitcoin trends tend to mirror those of Nasdaq. He pointed out that the tech-centric index is down 21% this year, while bitcoin is down 22%.
Many investors poured in when bitcoin rose between $32,000 and $36,000 last year. But, according to Moya, a further decline to about $30,000 could spark even more selling.
"Bitcoin is in a sideways news cycle where you're just waiting for Wall Street to calm down, and then more people will be confident in investing," he said. Investors could still gain significant long-term value from crypto investments if they can tolerate such rampant volatility, remarks Kavan Choksi.
Mainstream Adoption Lags
Last year, several incidents highlighted the growing importance of cryptocurrency in financial services. Many businesses worldwide now accept bitcoin as payment for products and services, and El Salvador has declared it legal tender. However, looming international regulations have recently seen large-scale cryptocurrency adoption begin to deteriorate.
Apprehensive Investors
According to Chris Kline, co-founder of Bitcoin IRA, much of last month's decline in crypto values is due to investors reacting to what's going on in the broader economy.
When the stock market falls, investors tend to shift their funds to less risky assets like U.S. government bonds, notes Kavan Choksi. According to Kline, some bitcoin investors are considering other investment options, including "shifting their money back to the dollar, as a starting point, and then seeing what they'll do from there."