Anyone who has been keeping abreast of digital currency news will most likely have been following the onslaught of the most recent crypto winter. Despite reaching a peak in value in November 2021, Bitcoin’s fortunes began to plummet dramatically during the following months, eventually dipping below $20,000. This represented a monumental decrease of 70%, a catastrophe that prompted more than one crypto trader to file for bankruptcy, whilst others were forced to lay off employees.
Despite this sharp frost, however, Bitcoin has managed to claw its way back up, although it is still far short of its best performance. While the world of cryptocurrency has experienced more than one winter over the past few years, the current one seems to be the worst and has led many people to scratch their heads and wonder if Bitcoin is still a sound investment or not.
The question of volatility
The main issue with cryptocurrency is undeniably its volatility, amply demonstrated by the collapse in Bitcoin’s value, among other events. Among financial analysts, the general consensus is that Bitcoin should only make up around 5% of anyone’s investment portfolio.
In particular, they recommend making sure that all essential financial provisions are kept safely stowed away, whether that is in an emergency savings account or a retirement fund, rather than risking these vital assets in such a volatile market.
Now that we know how rocky the road has been over the past few months for Bitcoin, it’s time to consider why.
First and foremost, Bitcoin’s volatility – and its regular rises and falls in value – is due to factors such as its supreme reliance on supply and demand. It is also easily influenced by speculation, which can cause the price to plummet drastically. In addition, Bitcoin’s price can fluctuate due to either positive or negative press from media outlets, prominent industry figures, and even influencers.
In addition, many external factors can (and do) regularly impact the crypto market, including Covid-19, the ongoing war in Ukraine, and rising interest rates and inflation. The US is experiencing its highest inflation in 40 years, caused by supply chain blockages and sharp increases in the cost of fuel and food.
Ironically, a few analysts are of the opinion that Bitcoin could actually be beneficial, particularly for people who want to keep their savings protected from inflation. Because Bitcoin can be held by individuals in a hardware wallet, rather than being stored in a centralized banking system that has the potential to ‘crash’, it can be kept safe no matter what is going on in the economy; it also cannot be taxed.
To invest – or not to invest?
Clearly, there are advantages and disadvantages to investing in cryptocurrency, and investing a substantial portion of your funds in Bitcoin is something many advisors would warn you against.
That said, anyone wanting to allocate a very small portion of their portfolio to Bitcoin and other cryptocurrencies could potentially reap the rewards in the long term. However, anyone who does take the plunge must be prepared to ride the fluctuating tides of crypto volatility, which will probably continue for months, if not years, to come.