This summer, two significant events occurred that will change the landscape and trajectory of cryptocurrency for the foreseeable future. Celsius Network, one of the world's largest cryptocurrency lenders, filed for bankruptcy protection a month after freezing customer assets in the wake of sharp turbulence in the crypto market that has toppled the business models of several firms. This has caused numerous coins and other digital currencies' market value to plummet, including Bitcoin's, which fell by more than half since its November 2021 peak. Cryptocurrencies' all-time highs of 2021 now seem like a distant memory, and the crypto crash of 2022 has seen major digital assets give back the gains they achieved during their historic bull run.
Plenty of experts say another crypto winter is already setting in. Between a collapse in the market and the ongoing liquidity crisis in the crypto industry, experts say crypto prices will likely remain low for the foreseeable future, as they did between early 2018 and mid-2020.
And while some believe we've hit rock bottom, many experts also say crypto prices will likely drop even further in the coming weeks or months. They point to what past bear markets have looked like for crypto — which experienced 85% corrections from all-time highs — and fresh concerns that the macroeconomic environment could worsen.
Additionally, crypto companies have laid off staff, frozen withdrawals, and tried to mitigate losses, raising questions about the industry's health. Coinbase, the largest crypto exchange in the U.S., announced in June 2022 that it was cutting 18% of its employees after layoffs at other crypto companies like Gemini and Crypto.com. Crypto bank Celsius abruptly halted withdrawals in recent weeks due to "extreme market conditions," and crypto hedge fund Three Arrows Capital may be facing liquidation. The looming recession doesn't bode well for the life and health of cryptocurrencies, either.
The crypto market has crashed before and will likely crash again, so it's important to be ready. Cryptocurrencies are notoriously risky and volatile, so investors can see market swings of more than 50% in a matter of months and as much as 15% price gains within 24 hours.
In moments of extreme uncertainty in the crypto market, here are things you can do to protect your finances:
Before investing in crypto, ensure you feel confident about your budget, debt, and savings. Having a solid budget and emergency fund can reassure you that you can still meet your financial goals and help relieve any stress you may be feeling about your investments. If you don't yet have a well-stocked emergency fund, don't buy crypto and instead start putting a small amount aside each month until you do.
Make sure to take some steps to safeguard your investments from the whims of the market. The best way to do so is to diversify what you invest in. Crypto should only take up a small portion of your portfolio of stocks, bonds, and mutual funds to help you achieve your long-term financial goals.
You should have a high-risk tolerance to invest in crypto and only invest an amount you're OK with losing. Experts suggest following the 5% rule — don't contribute more than 5% of your portfolio to risky assets like crypto. As with any new investment, it's essential to do your research and understand all of the risks associated with cryptocurrencies.
The crypto market has bounced back before, and if the stock market can be referenced as an example, it is likely to rebound again. However, it’s also likely that many coins will cease to exist as this latest crypto winter winds down. Many penny cryptos, for instance, which are highly speculative and volatile investments, may crash with no hope of revival. But so-called “blue-chip” cryptocurrencies, including Bitcoin, are more likely to weather the storm.