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Retirement

The Crypto Crash Is Here: What You Need to Know

Cryptocurrency has been riding a wave of fame in 2021. With crypto being used as cash to buy major things like cars, vacations and even basketball tickets—it’s safe to say it’s had quite the run this year. Well, that was until the end of June when we saw a crypto crash . . . and then again in September when crypto dropped thanks to news of China cracking down on the mining and trading of crypto.

Look, we won’t say we told you so—but, well, we kind of did. No matter how you slice it, cryptocurrency is up and down like a playground seesaw (and a whole lot less fun too). So, what’s the deal with this crypto crash, and will it last? Let’s dive in.

What Is Cryptocurrency? 

Okay, first things first—we have to talk about what crypto is. Cryptocurrency is basically just digital money. You can think of it like virtual cash that you keep in a digital wallet online. This digital cash can be used for investing and even online purchases. Did you catch all the times we said “virtual” and “digital” there? Yep, that’s right—crypto money exists only on the web. You’ll never see a physical coin of any kind (unless you cash it out for real money).

Why Is Crypto Crashing? 

Crypto coins took a major nose dive in June thanks to China’s central bank cracking down on cryptocurrency trading and mining.1 And in September, things heated up even more when China announced it would ban all crypto mining and make transactions using crypto illegal.2 Yeah, they’re coming down hard on this stuff.

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And who knows how a move like this will impact the way other countries regulate cryptocurrency. El Salvador recently jumped on the crypto train— Bitcoin is now national currency there (they’re the first country to do anything like that).3 But if anything, that just confirms how unpredictable cryptocurrency is—even in the way it’s accepted and used by countries! Here’s the thing—this stuff is all over the place, and nobody knows when crypto will crash or skyrocket. Ah, the joy of investing. But here’s what we do know: Putting your bets on cryptocurrency is a big risk. 

See, right now, banks and governments are pretty much out of the picture when it comes to cryptocurrency (meaning it’s been decentralized). And the fact that it’s decentralized by those powers that be makes people that much more interested in buying it. So who keeps tabs on cryptocurrency? Crypto exists on something called a blockchain—a database or ledger of sorts that keeps track of ownership without banks and governments watching.

How Does a Crypto Crash Impact Different Types of Cryptocurrency?

For the top dog Bitcoin, the crypto crash back in June meant that it lost all of the major gains it had made in 2021 as it fell below $30,000 (its all-time high was $63,000 back in April).4 In June, other big names in crypto took a tumble too, with Ethereum dropping to $1,800 (its lowest since March 2021) and Dogecoin nose-diving to 0.18 cents (its all-time high was 0.72 earlier in 2021).5,6

And in September, Bitcoin took another dive. This time, it fell to $40,400 after China’s big announcement.7 So, all those news-making, attention-grabbing headlines about how much Bitcoin had gone up this year? Yeah. Consider that all wiped out.

Overall, the value of cryptocurrencies fell and lost $188 billion in market value just three hours after China’s big announcement.8 That’s the way the crypto cookie crumbles. This is why investing your life savings in cryptocurrency is a bad idea. You never know when the rug will be pulled out from under you since crypto is so unstable.

Why Did Crypto Become Such a Big Deal This Year? 

Well, if you’ve been riding the crypto train for a while (like the diehards out there), then it’s always been a big deal to you. But there’s no denying that cryptocurrency has had some major wins this year that put it on everyone’s radar. Here are two big reasons cryptocurrency became a topic at the dinner table:

1. Social media meme stocks took over. 

It’s clear that when a group of people on the internet band together to buy something that’s pretty random, it’s hard to stop them. Enter meme stocks.

Back in January and February 2021, GameStop, AMC and BlackBerry stock jumped out of nowhere—all because people on the web joined forces to invest in companies that the big hedge fund guys were betting against. So instead of people investing in a stock because it’s doing really well, people invest in it because of its buildup on social media. That’s pretty much the definition of what a meme stock is.

And just like our favorite stories where the underdog comes out on top—it actually happened. The Reddit trend investors transformed these stocks that others had written off into big-time moneymakers. BlackBerry’s stock tripled, and AMC’s was worth 10 times more than it had been. But GameStop outdid them all by going up hundreds of dollars in just a couple of days. On January 21, GameStop shares were $39, but fast-forward less than a week later and it jumped to $355!9,10,11

Then in the spring of 2021, Dogecoin started its big push “to the moon”—aka trying to drive its price up past $1. And it worked . . . almost. With each tweet from Elon Musk and all the news coverage around it, the Doge climbed all the way to a high of 0.74 cents.12 Even though they didn’t hit the full one-dollar goal, they made a joke stock go from zero to hero pretty quick.

So, what’s the future hold for meme stocks? Well, it’s probably not over yet. A recent survey showed that 42% of average day traders are influenced by social media when it comes to deciding which investments to bet on.13 What’s that mean in plain English? Folks are listening to what’s trending on social media (instead of an investment pro) when they invest.

2. Cryptocurrency is being accepted as payment at more places. 

Crypto started to look like more of a legit investment to people when big names like PayPal, Overstock and even Tesla started to accept cryptocurrency as payment (Tesla has since changed its mind on accepting crypto . . . for now). All of a sudden, cryptocurrency has become more of a household name as companies keep saying they’ll take it as payment for your purchases.  

But just because cryptocurrency is being accepted at more places, that still doesn’t mean it’s a good bet for your money.

Alternatives to Investing in Crypto 

Well, let’s see, there’s gambling—just kidding. Investing in crypto itself is enough of a gamble already, and although investing is never a sure bet, there are much better places to put your hard-earned dollar bills than in cryptocurrency that’s pretty easy to sink.

Investing in Your 401(k) 

It might sound old and boring, but your tried and true 401(k) is a much better spot to park your investment money than cryptocurrency. No, it probably won’t be trending on a Reddit forum, but guess what? It’s way steadier than crypto and has a proven track record over time.

And instead of trying to time to market, placing your bets on whatever crypto is up and coming, and then selling when it’s hot—you’re going to set your 401(k) and forget it. Okay, we’re not talking about forgetting that it exists or anything. You just need to keep investing and leave it alone—aka don’t pull your investments just because someone told you to. Nope, not even if a global pandemic comes along. Remember, investing is for the long haul, and you’ve got the big-picture goal in mind here. In order to see the payoffs from your investment, you’ve got to stick it out. Simple as that.

P.S. You should hold off on investing—period—until you’ve paid off all your debt (except your home) and have a fully stocked emergency fund. Once you’ve landed there, you’re ready to start investing. We call this Baby Step 4.

So, stay away from playing the Will My Crypto Crash? game, and stick to the way less hyped (but still awesome) plan of long-term investing in your 401(k). And if this whole investing thing just has you scratching your head, don’t worry—you’re not alone there. That’s why you should let a trusted pro help walk you through your investing options. Talk with one of our SmartVestor Pros today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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Just when you thought investing couldn't get weirder, an internet dog meme became the hottest new cryptocurrency. Yeah, you've got to read it to believe it.

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