An expert explains the crypto dip: Why the market is down and what you should be doing during this time
This is our weekly series where Adetomiwa speaks to people with experience in crypto and takes you through everything they teach her. Let’s learn together!
TL;DR
I spoke to Nestcoin CEO, Yele Bademosi, about what is happening in the crypto market now (yep. The dip). Yele says it’s just part of the crypto cycle and this isn’t the first time that crypto is dipping . In fact, according to Yele, this phase is pretty normal in most growing economies.
”For any economy that grows, goes through periods of expansion and contraction” — Yele, 2022.
As for what to do, he said I should ask myself what I would do if crypto were to drop 20 or 30% (sell or keep holding) and whatever my answer is, I should do it now (you’re going to have to read the article to see why 👀 )
I have experienced a rollercoaster of emotions recently –I saw Bitcoin drop from $60,000 to $30,000 in the past 6 months. The rest of the crypto market has followed this trend.
Reader, I am a mess.
But I decided that before I go into full-on panic mode, the best first step would be to get some answers on what is happening to the market and what I should be doing with my assets.
For answers, I reached out to Yele Bademosi, a long-term crypto investor and the CEO of the crypto conglomerate, Nestcoin.
Yele told me that this dip season is “just a part of the natural cycle of crypto”. He says this up and down roller coaster has been a constant since 2008 when cryptocurrencies were first invented. “If you look at Bitcoin, we’ve had 13 [rise and fall cycles] of around 50% since its inception.” This means that since Bitcoin (the first cryptocurrency) was created, the market has witnessed at least 13 cycles where crypto fell by 50%. The most recent was 2021, when the cryptocurrency fell from $60,000 to $30,000 between April and July and rose back above $60,000 by October of the same year.
Yele pointed out that this isn’t only happening in the crypto market and that even traditional markets are experiencing dips. But interestingly, he says, “If you’ve bought stocks from top tech companies like Zoom or Shopify, you will have underperformed Bitcoin’’. Between Nov 2021 and May 2022, Shopify’s stocks dropped from $1,741 to $408, compared to Bitcoin’s $68,530 to $31,206 within the same period.
So what exactly is causing all the dipping?
Experts believe that the primary reason for the current market crash is panic caused by the current state of the world. The lingering effects of COVID-19 on economic activities, the Ukraine-Russia war and global inflation have made many investors worried about the market’s stability. When this happens, people tend to sell their assets, and the more volatile assets — like crypto and stocks — are usually the first to go. Once people start selling in large volumes, the market starts to slip.
Yele says that there’s some truth to this, but he adds that “any market movement is multifactorial”, so it’s usually a combination of things happening perhaps at the same time or synchronologically. Some of the other possible contributors he has observed are:
- The current U.S. inflation rate
The U.S. is currently experiencing its highest inflation rate in over 40 years. Yele suspects that due to how dependent the world is on the Dollar, this inflation situation puts pressure on the global investment market.
Yele explains that crypto is possibly affected because more investment institutions have taken interest in it recently and they treat crypto as a volatile asset class. So, whenever the market starts to seem shaky, they begin to sell their assets (thus devaluing them) and crypto is usually on that list.
- The slow-down on new DeFi innovations
Yele recalled that in 2020, people were inventing various ways to utilise Decentralised Finance. He explains that at that time, capital was coming into the market to fund or buy into the various projects developing as a result of these innovations. But in the past year, this has slowed down, “there is no new leading or driving narrative”, he highlights. This, he says, means that the previously high volumes of capital pumped into the market to fund these projects have now settled down. “This means that as opposed to capital staying within crypto, or moving from [project to project], it is going to Stablecoins, or even live in the market itself”.
Stablecoins are not meant to be volatile so why are they crashing?
Yele says that saying stablecoins are crashing is inaccurate. Some are, but most are not.
To understand why this is, it’s important to note that there are four different types of stablecoins:
- Physically-backed stablecoins (e.g. USDT, BUSD)
- Commodity-backed stablecoins (Paxos Gold)
- Crypto-collateralised stablecoins
- Algorithmic stablecoins
Yele explains that since physically-backed stablecoins are backed by a corresponding currency that is “verified and audited in a regulated custodian bank account”, it is safe from market volatility. (I can confirm that my BUSD and USDT are as I left them 🙏🏽 ).
For commodity-backed stablecoins, they are backed by hysterically low volatile assets like gold, so there might be some price disparity depending on the price of the asset it is pegged to. Crypto-collateralized assets are however more susceptible to volatility because they are backed by cryptocurrencies.
Algorithmic stablecoins (like UST) he says “try to mimic the value of the dollar”, and they are not fully collateralized, “meaning there are no corresponding assets to back them”. He says Algorithmic stablecoins are the most exposed because any volatile market movements put the entire system in disarray, this, he believes is why UST and LUNA have crashed so badly.
Zooming out
Yele pointed out that while the rise and fall is something to pay attention to, it’s not the only factor that determines how the crypto market is doing. We should also be paying attention to the fundamentals, “because those fundamentals are sort of the truest test of the value of the whole industry”. He says we should be looking at the number of products in the space, the number of users, and hash rates of the network. These, he says, will help determine whether or not the market is healthy. “If we look at the fundamentals over a period and see a decline, that’s when we should be worried”, he concluded.
I wanted to know what I should be doing with my crypto in this current market.
Yele says to act now. He says to start by asking myself what I would do if the price of my holding went down by 20–50%, “whatever you’re going to do in that instance, do it now”. He advises this because “the value of these assets can go either way”, and if I don’t have the financial capacity to take the risk, then I shouldn’t.
If my decision wouldn’t be to sell, however (if I have another source of income or have used the money I don’t particularly need right now to invest), then he suggests holding it for the long term — like 2 to 3 years.
Read Adeniyi’s insights on when to hold or sell crypto assets.
This conversation with Yele was reassuring. He taught me that what’s happening to the market now might be beneficial in the long run (“any economy that grows, goes through periods of expansion and contraction”). I was nervous about my stablecoins before going into the conversation but I feel much better now. As for my other crypto assets, I have decided to hold them long term and to use Dollar Cost Averaging to cushion my risk.
