Cryptocurrency just dropped by 30% in a matter of days. Noble compared it to the 1987 stock market crash, a period that took months to recover from. As a result, crypto may recover faster than equities did in the 1980s. Noble says there are many possible explanations for the sudden decline, but all of them point to a few common causes. Here are five of the most likely culprits:
Uncertainty pushes investors out of speculative assets
When uncertainty increases, investors move their money out of speculative assets in favor of safer investments. This causes the stock market to fall. The uncertainty in an investment market affects both the micro and macro levels. However, an educated investor will be able to change their investment strategy accordingly, so that they do not suffer major losses in one area of their portfolio. Here are some strategies to reduce the level of uncertainty in your investment portfolio:
As markets recover from March’s initial declines, the world economy remains susceptible to negative newsflow. While global growth has remained robust, uncertainty has pushed investors out of risky assets. Despite renewed demand, investors are avoiding emerging market debt and global equities. For the first time in more than six months, investors redeemed over $21 billion of these assets. The outflow of $13 billion in the first quarter alone was the largest ever for any quarter.
When uncertainty grows, companies are more likely to cut costs. Consumer spending in some sectors will fall during recession. This is due to a reduction in purchasing power. Additionally, the stock market is affected by uncertainty about company sales. For example, stocks of companies that sell non-essential goods may fall as consumers refrain from making purchases. As a result, non-essential goods stocks are likely to suffer from a sell-off during a recession.
Rise in inflation
The rise in inflation is fueling bearish crypto markets around the world. Inflation is at record highs and the Federal Reserve is expected to hike interest rates this week. That means stocks are falling, which is bad news for crypto. The recent sell-off in stocks correlates to the drop in Bitcoin, and the cryptocurrency has fallen in value when risk assets are falling. The CEO of Voyager Crypto, Steve Ehrlich, says that the collapse may be related to the tech sector.
Inflation is measured by the Consumer Price Index, a measurement of the price of goods and services. The CPI is published by the Bureau of Economic Analysis, and it tracks prices for goods and services in the US. The CPI rose 8.6% over the past year, which was the highest increase since 1981. When the CPI rose above 5%, markets were stunned. A prolonged rise in inflation is not a good sign for the market.
The Fed has a dual mandate, and inflation will likely trigger a monetary tightening, lowering asset prices. This will have negative consequences for all kinds of assets. Inflation-resistant currencies, like Bitcoin, are often cited as “inflation hedges” for their inherent stability. However, this is not necessarily true. While Bitcoin is widely regarded as being “inflation-proof,” it will actually experience inflation as more coins are mined. As a result, the price of bitcoin will likely fall.
Investing in low-cost index funds to avoid volatility
One way to invest in stocks without the volatility associated with cryptocurrencies is to invest in low-cost index funds. This is an excellent way to participate in the economy, even if crypto isn’t the stock you’re interested in. Index funds track a particular index, meaning you can invest in any market or sector with a low-cost index fund. You can find index funds in different categories, such as the S&P 500, Nasdaq-100, and NASDAQ.
Another way to invest in cryptocurrency is by purchasing blue-chip stocks. While crypto just dropped in value, these stocks haven’t recovered their values yet. This dip can provide an opportunity to purchase a large company for a bargain price. However, NerdWallet recommends avoiding individual stocks, saying that low-cost index funds are a better choice for most investors. The lower-cost index funds are diversified and are less risky than individual stocks.
Alternatively, you can invest in a target-date index fund and match it to your brokerage account. Vanguard has a large list of target-date index funds. These funds can be included in your 401(k) or retirement account if you are working at a company that matches your contributions. While these funds can be a good option, remember that the expense ratios are higher than those of other low-cost index funds.