Bitcoin and other altcoins have been in a deep sell-off in 2022. Most of them, including Bitcoin and Ethereum, have crashed by over 50% from their all-time high. As a result, investors have lost over $1.2 trillion in the past few months.
In this article, we will explain why cryptocurrencies have dropped to a bear market and why you should buy. Read here to find out more about buying Bitcoin with a credit card and below on why you should buy during the dip.
Why cryptocurrencies have crashed
There are several reasons why Bitcoin and other altcoins have crashed in the past few months. First, the biggest reason is the Federal Reserve and other global central banks.
In their response to the Covid-19 pandemic, global central banks embraced the biggest expansionary policies on record. For example, the Federal Reserve decided to slash interest rates to zero. In addition to that, it announced the biggest quantitative easing (QE) policy ever. In that policy, the bank printed and pumped more than $5 trillion to the financial market.
The same trend happened in Europe, where the European Central Bank (ECB) decided to slash interest rates to the negative zone. It then started quantitative easing in which it pumped over 1.8 trillion euros to the market.
Other central banks that embraced quantitative easing were the Bank of Japan (BOJ), Bank of England (BOE), and the Reserve Bank of Australia.
In most cases, low-interest rates usually lead to more demand for risky assets like stocks and cryptocurrencies. This explains why stocks surged to an all-time high during the Covid-19 pandemic. It also explains why cryptocurrencies like Bitcoin and Ethereum also surged.
Now, with the global economy recovering, central banks have embarked on a tightening process. For example, the BOE has already started hiking interest rates. In the US, the Fed has started to wind down its quantitative program and hinted that it will implement at least three rate hikes this year.
These announcements have led to a major global bond sell-off, which has pushed their yields to a multi-year high.
Profit-taking and regulatory concerns
The second reason why cryptocurrencies have crashed is the fact that most investors have started to take profit. Besides, most coins have surged in the past few years. Bitcoin has risen from less than $5,000 to over $30,000 while Ethereum has moved from less than $100 to over $4,000.
Finally, there are concerns about regulations. In the past few months, more regulators have expressed concerns about cryptocurrencies. For example, the Bank of Russia has warned that the government should ban these cryptocurrencies. India has also warned that it could ban or increase regulations of the sector. Therefore, some sellers are worried about these regulations.
So, here are some reasons why buying the dip makes sense.
New normal
It is easy to understand why investors have sold their cryptocurrency holdings. Historically, Bitcoin and other cryptocurrencies have underperformed the market in a period of high-interest rates.
However, investors might have overreacted and coins will likely start rising as investors start to live in the new normal of high-interest rates.
The same situation happened in 2018 when the Fed implemented three rate hikes. Bitcoin initially declined sharply in January when Jerome Powell hinted that the bank will implement three rate hikes. The coin then started gaining later in the year as investors embraced the new normal.
Oversold zone
Another reason why it is good to buy during this bear market is that many coins are now getting in an oversold zone. As you can see below, oscillators like the Relative Strength Index, MACD, and the Stochastic Oscillator have moved to the oversold level on the weekly chart. This implies that a bounce could happen in the coming months.
Regulations
Finally, while some investors are afraid of regulations, we believe that they will be good for Bitcoin and other cryptocurrencies. That’s because a well-regulated industry will attract more institutional investors.
Today, investors have access to cryptocurrencies and even a Bitcoin futures ETF. Most of them, however, have stayed away from the industry because of fears about regulations. For example, in a statement, Citadel Securities said that the main reason why it has avoided the industry is because of regulations.
Therefore, if the SEC and other regulators introduce new and better regulations, there is a likelihood that more investors will move to the industry.
Final thoughts
Bitcoin has crashed by over 50% in the past few months. While this is scary, it is not the first time that the coin has performed like that. In 2021, the coin declined from almost $60,000 to less than $30,000. Similarly, it declined from almost $20,000 in December 2017 to $3,800 in March 2020. In all these times, the biggest beneficiaries have been investors who bought the dips. Therefore, it is a good idea to buy the current bear market.
