If you’ve just stepped into the highly uncertain world of cryptocurrency, you have probably noticed the recent bloodbath in the crypto market over the last week, which witnessed a complete shakedown in terms of a massive price correction, as prices of major currencies like Bitcoin, Ethereum, Binance Coin and the rest collapsing by as much as 30 per cent.

In order to understand the causes behind the setback, one not only needs to have a working knowledge of cryptocurrencies, but also of the most common problem that plagues investors, i.e., understanding the right time of entry and exit.

A game of mindsets

Over the past few years, skyrocketing prices in cryptocurrency trade generated solid returns, despite some corrections. In 2021, crypto enthusiast Elon Musk’s tweets reinforced the confidence of investors. On the flip side, those new to crypto markets became overtly hopeful of making quick money, without having researched the trigger points of the up and down movements in the market. Fuelled by greed and lack of technical knowhow, this highly volatile market witnessed a massive influx of newbies in 2021.

This also meant that crypto trading platforms such as WazirX, CoinDCX, and Coinswitch saw a huge rise in user base within a very short span of time. Novice investors who had just entered the crypto world to invest money, were swallowed by the pendulum movements of major cryptocurrencies. Also, the meme currency, Dogecoin, saw a lot of investing this year despite having no fundamentals to back its movements. The sole contributor behind the bullish trend was — that’s right — Elon Musk.

Nonetheless, let us take a step towards curing this problem while we still can, and delve a little into the fundamentals of cryptocurrency.

Cryptocurrency in a nutshell

Fiat currencies (or conventional currencies) have value because the government says they do. We trust the banks to safely hold this currency and return it to us when we want them to. This is regulated by a central authority and the word of the written law. In other words, this is a highly centralised financial framework. Each transaction can be proven only by records of banks. There is no other way to prove it, leaving the transactor at the mercy of banks.

Cryptocurrency, on the other hand, is based on a more transparent system that does not involve any other entity except the sender and receiver in a transaction. A set of such transactions forms a block, and a set of blocks chained together in a secure and accessible manner is what is called a ‘blockchain’, which forms the basis of the crypto market. The ledger containing the record of all such transactions is publicly accessible and untouchable by any other person, making it completely decentralised.

Each cryptocurrency derives its value from a limited supply, which will remain limited to the same amount for its entire life. A fixed amount is released into circulation for transactions after a fixed period of time, in addition to the already existing amount. For example, the total number of Bitcoins in circulation is limited to 21 million since their creation in 2009, of which only 18 million have been released so far. A fixed number of Bitcoins is released after every 4 years, and will continue to be released until the 21 million mark is reached.

Where the cliff jumps of cryptocurrencies began

1. China’s digital-asset policy

China has issued a ban on financial institutions and payment gateway companies from services that support transactions of cryptocurrencies in any manner whatsoever. This means that the routine registration, trading, clearing, and settlement services provided by banks and payment channels are no longer allowed by China. In 2017, China had issued another similar ban, to which it has now added more stringent rules, claiming “virtual currencies hold no real value”. The country also warned investors against executing speculation-based cryptocurrency trades. Nonetheless, China’s crackdown on cryptocurrency isn’t the only event to which this slump must be pegged.

2. Bearish tweets from Elon Musk

Crypto market protagonist Elon Must has been known for promoting a meme currency called Dogecoin through his consistent tweeting, which made investors hopeful and drove its price high. Musk was solely responsible for driving the uptrend in cryptocurrency prices, especially Dogecoin and Bitcoin.

In a similar yet careless event, Musk tweeted that electric vehicle giant Tesla wouldn’t henceforth be accepting payments in Bitcoin until its environmentally friendly nature was established. After the slump, however, Musk was back with a tweet indicating that Tesla was holding on to its crypto stockpiles through the crash.

Both events, although exclusive, instilled a massive fear and shook the crypto markets. Frenzied selling took over, as prices plummeted and those who had just invested got gobbled up in the mayhem.

Is this a reason to worry?

Violent price corrections are common in the world of cryptocurrencies. Most experts believe this is no cause for concern. It is in fact a healthy correction that will weed out faithless investors and display loyalty to those who firmly hold their ground.

When traders book massive short-term profits, a price correction of this kind can be spotted a mile away. The fall of Bitcoin, according to most analysts, was highly anticipated, as, like with equity markets, a long-lasting rally is usually a sign of trouble. Ironically, for new investors hoping to foray into crypto trading, this is the perfect time to enter the market. Those investing in cryptocurrencies for the long haul can view this as a great buying opportunity before the next bull run.

That said, we also encourage investors to engage themselves with a lot of reading about the cryptocurrency market, price movement triggers, and resistance values. An in-depth understanding of these aspects will bear fruit, as it will back informed trade decisions in the future.

The author is CEO & Founder, Finway FSC

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.