Now that Bitcoin (BTC) has broken $47,000 and Ethereum (ETH) has surpassed $3,400, cryptocurrencies are again making headlines. This comes after a severe decline in value that caused Bitcoin to drop by more than 50% from its peak in November 2021.
There is cautious optimism among investors regarding a return to the golden era of late 2021 due to this bullish trend. However, the long-term viability of the bitcoin sector remains a source of concern. This brings us to our topic of discussion: the current rally and the need for caution.
How Does the Rally Get Started?
Some factors are probably causing the present crypto boom:
Short squeeze
According to some analysts, there may be a short squeeze at work. Simply put, a short squeeze happens when investors who have placed bets on decreasing prices—known as short-sellers—are compelled to repurchase assets to cover their positions, which raises prices even more.
Institutional interest
The cryptocurrency market is once again attracting the attention of institutional investors, including asset managers and hedge funds. This newfound attention may offer the legitimacy and stability that are sorely needed.
Geopolitical tensions
Due to the ongoing crisis in Ukraine and the growing unpredictability of the world economy, some investors are turning to alternative assets like Bitcoin, which they see as a hedge against inflation and conventional financial upheaval.
Will Foreign Investment Return with the Crypto Market Revival?
Research by a technology think group in Delhi claims that the new crypto tax laws implemented in 2022 caused a $3.8 billion shift in bitcoin trading volume to international exchanges. A number of overseas cryptocurrency exchanges that the finance ministry’s FIU discovered in December last year were determined to be breaking the country’s anti-money laundering regulations. The URLs of several foreign exchanges, including Kucoin and Binance, were prohibited in India.
Additionally, the government ordered cryptocurrency exchanges, domestic and foreign, to register as “reporting entities” with the FBI. They must comply with the conditions set forth by the PMLA (Prevention of Money Laundering Act) 2002. Leaders in the industry claim that these actions have further encouraged cryptocurrency platforms operating in India to collaborate with regulators to maintain their businesses and draw Indian investors to domestic exchanges, thereby limiting the outflow of funds.
A Reason to Celebrate—but Proceed Cautiously
Even while the current surge is good news for supporters of cryptocurrencies, it’s crucial to keep a balanced viewpoint. Here are a few causes for prudence:
Regulation is still up in the air
Regulatory ambiguity is one of the biggest obstacles to the broad adoption of cryptocurrencies. Governments worldwide are still debating how to control this emerging asset class. For investors, unclear legislation may result in an unpredictable environment.
The underlying technology still needs to be improved
Blockchain technology is still in its infancy, but it has a lot of potential. Widespread acceptance requires addressing issues like energy consumption, scalability, and the ability to handle vast amounts of transactions.
Volatility is still a fundamental quality
Because of their inherent volatility, the prices of cryptocurrencies can fluctuate significantly over short periods. For novice investors, this volatility may be unsettling and impede wider acceptance.
Now, what should We do?
Here are some pointers if you’re thinking about getting into the cryptocurrency market:
Conduct independent study (DYOR):
Avoid mindlessly following the crowd. Before investing, educate yourself on the technology, associated dangers, and possible returns.
Just make assets you can afford to lose:
The cryptocurrency market is volatile. Only spend what you are comfortable losing completely.
Start small and diversify:
Avoid putting all your eggs in one basket. Consider starting with a small investment in a well-known cryptocurrency such as Bitcoin or Ethereum, then diversifying your portfolio with other asset classes.
Be patient, as the cryptocurrency market is still in its early stages. Expect to become rich over time. Prepare for a long-term investment.
Also read: Bitcoin Weathers The Storm: Rebound After Mideast Tensions
