“I have to confess that I find it all exhilarating. I’m only concerned somewhat for the relatively new investors who get drawn into these things and then find out the hard way. I sympathize completely with these people out there enjoying this bubble, but they’ve always ended very badly, and I have no doubt this one will too.” Jeremy Grantham

The price of Bitcoin dropped below $40,000 for the first time in months and the cryptocurrency fell more than 40 percent off recent all time highs.

There are reasons for the recent crash in the price of Bitcoin, according to Barron’s Magazine. Recently, China banned the use of cryptocurrencies for financial institutions asserting that “virtual currencies shouldn’t be used in the market as they are not supported by real value”. Instead, China intends to create its own indigenous cryptocurrency that will allow the regime to monitor and track its citizens

Furthermore, other countries might be considering tighter regulation, particularly as cryptos become the currency of choice for ransomware hackers and money laundering. Additionally, Tesla stopped accepting Bitcoin as payment for vehicles and Elon Musk expressed climate-related concerns over Bitcoin’s mining process.

But sometimes things go down because they are going down, according to Barron’s. Investors who bought early are looking to lock in gains, while recent arrivals to the crypto game are panicking. Selling begets selling.

Image Source: Getty Images

Bubble Burst

“We’re a crazy marketplace full of irrational human beings who behave themselves 80% of the time and then 20% of the time totally freak out one way or the other.” Jeremy Grantham

Retail investors piling into Bitcoin have fueled a historic price bubble that has finally burst. When stock bubbles pop, the selling usually stops when shares drop well below intrinsic value and become attractive to a new class of value investors who didn’t partake in the market froth.

Cryptocurrencies are different. They have no intrinsic value, which means there’s no telling when the selling might stop.

Essentially, Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. Overall, the mainstream acceptance of Bitcoin is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with tech enthusiasts, speculators — and cybercriminals.

When Bitcoin sneezes the rest of the crypto complex catches a cold. https://t.co/lNscaroBxa

— Barron's (@barronsonline) May 19, 2021

“The concerns among investors and traders is that perhaps we are about to see another crypto winter and it may take a long time for Bitcoin price to see any recovery as the bull cycle may be over,” said Naeem Aslam, chief market analyst at AvaTrade.

“The actual answer is that no one really knows about that and the only thing that we do know is that institutions are still buying Bitcoin on every dip,” said Aslam.

Maintain a long-term outlook

Stock market and assets, like cryptocurrencies, bubble bursts can be intimidating, but they’re no cause for panic. Historically, the market has always recovered from every one of its downturns — and it’s extremely likely it will bounce back again.

If you maintain a long-term outlook, it’s easier to avoid panic-selling when asset prices begin to free-fall. Remind yourself that the market will recover eventually, and you’ll be able to ride out the storm.

The key to investing for the long term is to ensure you’re investing in quality assets. And, investing during market downturns can actually be a cost-effective move.

Because asset prices are lower during market downturns, it can be a good opportunity to buy good assets, like stocks (and cryptocurrencies, if you’re so inclined), at bargain prices.

References:

1. https://www.barrons.com/articles/china-issues-crypto-bitcoin-warning-51621416378
2. https://www.dallasnews.com/business/technology/2021/05/19/bitcoin-falls-below-38000-whats-going-on/
3. https://barrons.cmail20.com/t/ViewEmail/j/62CDF96507F967432540EF23F30FEDED/9E2B0856731CA0B32018F019E6F15D33
4. https://markets.businessinsider.com/currencies/news/jeremy-grantham-gmo-stock-market-bubble-burst-before-may-2021-2-1030118339
5. https://www.fool.com/investing/2021/04/03/3-ways-im-preparing-for-the-stock-market-bubble-to/