Cryptocurrency prices fell last week following news Friday that the People's Bank of China declared all cryptocurrency activities in the country illegal. Overseas crypto exchanges operating in mainland China are also illegal, PBOC officials said.
The resulting drops in popular digital currencies bitcoin (which fell by about 5%) and ether (which shed 7%) are just the latest downdrafts in what has been a choppy market for crypto. Both coins were down as much as 10% September 20 amid turmoil in the stock market before settling in for single-digit losses on the day. Popular coins struggled Tuesday alongside another mini pullback for stocks, too.
China's recent announcement sounds more dramatic than it actually is, cryptocurrency experts say. Still, here's why investors in digital currencies, especially the smaller ones, would be wise to brace for continued volatility in the markets.
China's latest move against crypto is nothing new, says Stéphane Ouellette, CEO of FRNT, a crypto-focused institutional capital markets platform: "China effectively made it illegal as early as 2013 when they made it illegal for banks to process crypto transactions."
All the same, U.S. investors see news of government crypto regulation abroad and fear that government interference could hurt crypto prices here. "The bigger risk is the U.S. regulatory apparatus emulates China," Meltem Demirors, chief strategy officer at Coinshares, recently told CNBC. "D.C. has been increasingly aggressive with crypto enforcement and clearly sees crypto as a threat to the government's ability to manage markets."
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Crypto prices tend to ebb and flow more than traditional markets, says Ouellette. With financial media amplifying investor concerns, negative moves can seem more dire than they actually are.
"This China news might look really nasty, but people forget that the financial media explains every move. A new investor might think a new announcement is material when it isn't," he says. "And then people think the sky is falling because bitcoin is down 10%. That's not a big down day in crypto. It happens 75 times a year."
As the value of bitcoin has bounced around this year, investors have searched for the "floor" — the price at which traders will reliably buy back into a declining asset to boost its price back up. "From May through early August, it was pretty stomach-churning. It was bouncing between $29,000 and $39,000, and at $29,000 it felt like either a breakdown or a head fake," Ouellette says. "Then it broke above $40,000, and for now, it looks like $40,000 to $50,000 is the new range."
But just because there appears to be a $40,000 floor now doesn't mean the price of bitcoin can't go crashing through it, especially if the stock market takes a turn for the worse, says Tendayi Kapfidze, chief economist at U.S. Bank. The same goes for any coin on the market. "Everything suggests so far that cryptocurrencies are highly correlated with the broader market. When things go up, they will go up a lot more. When things slow down, they will go down a lot more," he says.
As it relates to all kinds of cryptocurrency, he says, "you have to understand the risk you're taking as an individual investor."
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Carefully examine any high-priced coin that offers little to no current utility for holders, Ouellette suggests. "Some of these tokens are highly speculative, and most aren't used for anything yet," he says. "Developers tell you a token lives on the blockchain and does this and that, but it doesn't. It's actually that it's maybe going to be able to do something in two years. Some of these coins have billion-dollar valuations."
Investing in the crypto market is similar to the late-'90s craze in dotcom stocks, Ouellette says. "Even if you believed in the long-term value of the internet, you still have to pick the winners, and there are going to be a lot of zeros," he says. "If you're not at your computer all the time, it can take two days for some of these coins to go to zero."
For this reason, crypto experts urge investors to not spend more on cryptocurrency than they can afford to completely lose. And the crypto investments you do choose should be well-researched and carefully chosen, they say. "Some of these instruments are not creating value. There's no economic output," says Kapfidze. "They're transferring wealth from some people to other people. You need to figure out which side of that equation you're on."
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