Millions of investors, speculators, and crypto hobbyists have bought and sold cryptocurrency in the past decade or so, hoping that crypto would be both a powerful investment and a currency of the future. As a result, the cryptocurrency market is booming.
Bitcoin, the most recognizable crypto name, has increased from a low point of around $5,000 in March of 2020 to a price of more than $51,000 as of the time of this article’s writing. Rival currencies, including Ethereum and Litecoin, have emerged as realistic competitors – and even meme currencies like Dogecoin are still floating around.
On top of that, a growing number of merchants are accepting cryptocurrency as a form of payment. Nearly a third of all U.S. small businesses currently accept crypto as payment – and that number is consistently growing. Crypto optimists suggest that this is the natural momentum and that it’s only a matter of time before crypto becomes truly mainstream.
There’s a lot of momentum pushing the crypto movement forward. So what, if anything, could halt that momentum?
Watching the Signals
First, what do we mean by “momentum,” and what could really bring it to a halt?
Most investors will tell you that price is the most crucial variable, and they definitely have a point. The price of an asset is typically a good signal of both trading volume and consumer confidence; the more faith people have in a given asset, the further its price will rise.
The prices of Bitcoin and other prominent coins have been rising steadily for the past several years; if prices stabilize or start plummeting (without a quick recovery), it could indicate that faith in crypto is wavering.
We can also look at more sophisticated signals, such as detecting when an asset is overbought or oversold. Price fluctuations aren’t always directly correlated with market attitudes toward an asset or the value of that asset.
If we notice that Bitcoin’s price is rising explosively, but that it’s “overbought,” we can expect its true momentum to be slower than its perceived momentum – and that the price will soon float back down to a reasonable level.
If we notice that it’s “oversold,” by contrast, a sudden decreasing price may not be a true reflection of stagnated or lost momentum; it could just be a temporary hiccup in the middle of a long stream of growth.
In any case, it’s not easy to concretely define the upper and lower bounds for crypto’s growth trajectory or momentum. Even considering that, some clear disruptive events and developments could test the optimism of even the most faithful investors.
New Regulations or Laws
New regulations or laws could have a pronounced effect on public faith in crypto. Most developed countries of the world are agnostic on crypto, and some have even created their own cryptocurrencies (more on that later). But some countries have outright banned crypto trading for their citizens.
Suppose significantly developed countries start bringing the hammer down on crypto trading. In that case, it could begin to a kind of domino effect, ultimately threatening the future of crypto’s utility as a decentralized currency.
A Major Security Issue
So far, crypto has been hailed as inherently more secure than conventional forms of money exchange. And anyone familiar with the decentralized ledger at the heart of blockchain technology knows that security vulnerabilities are few and far between.
That said, a legitimate security threat (such as a prominent 51 percent attack or something similar) could shake consumer faith in crypto as a secure asset.
The attack or security threat doesn’t need to be particularly threatening or damaging; it just needs to force investors to reconsider their perceptions.
Declining Keystones
The crypto world currently revolves around Bitcoin, and to a lesser extent, Ethereum, Litecoin, and a handful of other major players. These are the headliners of the crypto community, even though dozens of promising younger candidates have emerged.
If any of these “keystone” currencies take a significant nosedive, it could send a ripple effect throughout the crypto market. This would slow down the growth momentum that the market has enjoyed for the past several years.
Overcrowding
Competition and overcrowding in the crypto market could also be an issue. Thousands of new currencies are clamoring for market share. This ultimately makes it harder for individual currencies to stand out, confusing newcomers.
- ICOs There are thousands of new crypto projects rolling out every year. While most fizzle out in a matter of months, the landscape for cryptocurrencies is constantly expanding.
- National digital currencies. Some countries, including Venezuela, Ecuador, and China, have issued their own government-backed cryptocurrency. While this, in some ways, defeats the purpose of crypto, enough support for these projects could legitimately threaten the decentralized currencies we’ve come to enjoy.
A Wider Economic Collapse
As you might imagine, cryptocurrency growth could also come to a halt if there’s a broader economic collapse. If people begin to fear for their economic futures, they may pull out of crypto markets. And, they may return to the comfort and security of more familiar financial systems.
- Federal reserve action. The Federal Reserve has kept interest rates low for many years to stave off an economic recession. Recently, the institution has announced plans to increase rates steadily over time; rate increases that are too sudden or too extreme could have a lingering effect on the broader market.
- A real estate market/stock market crash. While crypto hypothetically should operate independently of other markets, a major crash in another financial market would likely have a noticeable effect on crypto prices. For example, if there’s a stock market crash or another housing bubble forms and pops (like in 2008), crypto’s momentum could come crashing down.
- Geopolitical events. Major geopolitical events, such as the start of a new major war or other forms of economic turmoil, could also have a souring effect on nearly every financial market. These, of course, are largely unpredictable, but they could have a powerful impact on the future of crypto.
What to Do If You Anticipate a Crash
What if you notice some of these developments and you suspect a forthcoming crash?
There are a few actions that may support you if your prediction turns out to be correct:
- Diversify your holdings. Portfolio diversification is a good strategy for any investor, even if you don’t hold any crypto. It’s even more critical if you have risky holdings.
- Chart regular withdrawals. If you want to recognize your profits and minimize losses, you can start slowly withdrawing your investments in small increments.
- Influence what you can. If you believe in the future of cryptocurrency, get active. Evangelize the benefits of the currency and speak out against new regulations that could threaten it.
The world is growing more accustomed to the presence of cryptocurrency, but crypto is still a relatively new financial tool. As a result, there’s a lot we don’t understand about crypto’s eventual place in the world. And, there are a lot of unknown variables that will influence its development.
Because of that, it’s essential to continue treating crypto as a volatile and risky asset, even if it seems like crypto’s momentum will continue accelerating well into the future.
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