With crypto suffering a major overnight blow, investors in the alternative asset class are wondering what steps to take. The decision to buy, sell, or hold any security depends on the context of the crash, so let's get into what's causing crypto to tank right now.
Here are the details on the severity of the crash and what considerations you'll want to make as an investor.
Bitcoin is coming off of all-time highs.
During the week of Nov. 7, Bitcoin (BTC) reached a new all-time high above $68,000 per coin. That's insane considering that BTC started the year under $30,000.
When the prices initially surged, investors were piling value into the asset in hopes of achieving maximum value. However, recent changes in the crypto environment have inspired a sharp drop in value for the entire cryptocurrency ecosystem including Bitcoin.
How much have the top coins dropped?
Overnight, leading cryptocurrencies Bitcoin and Ethereum (ETH) dropped about 8 percent of their value. Meanwhile, altcoin Polkadot crashed 11 percent.
Eight of the top 10 cryptocurrencies traded lower overnight. As for the entire crypto market, the overall market cap shed about 7 percent as trading volume increased by 33 percent.
Why crypto is crashing now
The crash follows President Biden signing the infrastructure bill into law. The $1.2 trillion bill might pave the way for broadband, roadway, railway, and resiliency expansion across the nation—but it also impacts crypto traders in a few significant ways. As a result, many crypto holders have trimmed their positions in an attempt to minimize the new law's impact.
What the infrastructure bill says about cryptocurrency
The infrastructure bill, or the Infrastructure Investment and Jobs Act (IIJA), has been officially signed into law by President Biden. The bill includes $1.2 trillion in total spending allocation, including $550 billion in new spending.
Within the bill are two key points that impact cryptocurrency taxes. The government's goal is to use cryptocurrency taxes to help fund the initiatives. As a result, the government's definition of what a cryptocurrency "broker" is has expanded and brokers must issue 1099-like forms disclosing their customers. Additionally, any business or exchange receiving at least $10,000 in cryptocurrency payments must report it each time.
Another cause for the crypto crash: China cracking down on illegal mining
The last time cryptocurrency values tanked so dramatically occurred when China's central bank instituted a complete ban on crypto trading and mining.
Now, China has announced that it plans to crack down on large-scale mining and state-owned entities involved in Bitcoin mining. The threat and speculation have contributed to a major market correction.
Is it just natural crypto volatility?
The reality is that Bitcoin and other cryptocurrencies are especially prone to vulnerability. The asset class remains speculative and investors are at risk of intense upward and downward fluctuations in market value. This reduces the liquidity of these assets, which is why many experts suggest limiting the percentage of your portfolio that you allocate to cryptocurrency.
By investing what you can afford to lose, you will likely be able to stay in the market during crashes like this one with the hopes of coming out on top. As Nate Nieri, CFP with Modern Money Management, told reporters, "Don’t gamble an amount that would burden your family or prevent you from achieving your goals."