Will the cryptocurrency market recover?

CRYPTOCURRNECY markets went down dramatically wiping billions from their value.

Bitcoin and Ethereum prices plummeted to their lowest since last year after months of record highs for the digital coins, highlighting just how unpredictable they are according to experts.

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The fall follows China announcing a crackdown on cryptocurrencies and bitcoin fan Elon Musk revealing that Tesla would no longer accept it as payment.

The price of bitcoin plunged below $32,000 – down almost 40% in a week – before recovering to around $40,000 at the time of writing on Thursday morning.

Bitcoin had hit an all-time high of $64,863 back in April.

Before crashing this week, crypto markets had risen on the back of adoption among traditional financial firms.

Support from Mr Musk and other famous names has also pushed the cryptocurrency further into the mainstream and sent its value surging in recent months.

But individual investors risk losing all their money.

Crypto prices can go and up and down, and they can do so very quickly making it a big risk to invest in them.

You should only ever invest money you can afford to lose and put your money into financial products that you understand.

This isn't the only risk: your money is not protected and you can't complain to a regulator or ombudsman if something goes wrong, while fees and charges can be higher than with traditional investments.

5 risks of crypto investments

THE Financial Conduct Authority (FCA) has warned people about the risks of investing in cryptocurrencies.

  • Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements. 
  • Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
  • Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market. 
  • Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.  
  • Marketing materials: Firms may overstate the returns of products or understate the risks involved.

There's also no guarantee you can convert crypto back into cash.

The crypto market crash has also seen outages on trading platforms, leaving investors unable to access their cash or sell crypto holdings when they need to.

It's not the first time that crypto markets have plunged after a boom and bitcoin previously experienced a crash in 2018 after going up in price in 2017.

Experts have highlighted that cryptocurrency prices are wildly unpredictable.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown told The Sun: "Crypto holders who are hoping for a rapid bounce back from this week’s dramatic falls, should buckle up and expect a fresh rollercoaster ride.

What is Bitcoin?

BITCOIN got you baffled? Here’s what you need to know:

  • Bitcoin is a virtual currency
  • It's traded between people without the help of a bank
  • Every transaction is recorded in a public ledger, or "blockchain"
  • Bitcoin is created by mining
  • Mining involves solving difficult maths problems using computer processors
  • Bitcoin can be traded anonymously, which can make it a popular way of funding illegal activities
  • The value of Bitcoin fluctuates wildly
  • Bitcoin is one of many different cryptocurrencies, but by far the most popular

"There is unlikely to be a smooth rebound from losses in this volatile environment."

She said that other countries could follow China in cracking down on crypto which could hit values, and growing concerns around bitcoin's energy use could also drag down prices.

She said: "The direction of travel is though far from clear, as some crypto fans may see the recent falls as an opportunity to buy into their currencies at a cheaper price.

"Many cryptocurrencies and tokens are heralded as being part of the decentralised finance movement, which aims to disrupt current payment systems.

"In this murky world, where the use case of crypto currencies is far from proven, traders should only dabble with money they can afford to lose.’’

Laith Khalaf, a financial analyst at AJ Bell, said: "The difficulty with crypto is that the possible outcomes are extreme – either high loss or high return.

"It’s entirely possible that crypto could recover the losses sustained in recent weeks, but price movement of late has mainly been driven by sentiment, which is a fickle beast.

"The difficulty is crypto offers little or no economic value in the here and now, and an extremely unpredictable value in the future, as its long term adoption by businesses and consumers is uncertain, to say the least."

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