Things were looking pretty good for cryptocurrencies and the folks who went all in to “invest” in them . . . for a little while, at least.
Cryptocurrencies like Bitcoin, Ethereum and even joke coins like Dogecoin all shot up in value in the aftermath of the COVID pandemic. Bitcoin, the very first cryptocurrency and most popular of the bunch, hit an all-time high of almost $68,000 in November 2021.1
Crypto firms were so confident heading into the new year that they spent millions of dollars on Super Bowl ads to convince folks to hop on the crypto train. (How did that work out for you, Matt Damon?).2
And then the cryptocurrency market crashed—and it crashed hard.
What Is Cryptocurrency?
But let’s back up just a minute. Let’s talk about what crypto is and why so many people got so excited about it as an investment.
In a nutshell, cryptocurrency is just digital cash. What sets cryptocurrencies apart from traditional currencies like the dollar is that they’re independent of any government or central bank. Instead, cryptocurrencies rely on blockchain technology—basically one big online ledger—to verify transactions and store information.
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Fans of cryptocurrency see it as the currency of the future and the blockchain as a promising new technology with benefits that go beyond crypto. Some treat crypto like a safety net—something to have in case the dollar collapses. The problem is, crypto still isn’t widely accepted in the marketplace as an alternative currency (good luck trying to buy a Big Mac at McDonald’s with Dogecoin) and fails to hold its value when the economy is going through rough waters (more on that in a minute).
Sure, it’s all very interesting stuff. But crypto is still an unproven and risky investment that has worse mood swings than a teenager. Which leads us to . . .
The Crypto Crash of 2022
Look, we won’t say we told you so—but we kind of did. Many experts, including Dave Ramsey on The Ramsey Show, sounded the alarm early and often about how volatile and unpredictable cryptocurrencies are. Others said the cryptocurrency market was in a bubble. And here’s the thing about bubbles—they always pop. And, boy, did the cryptocurrency bubble pop.
In May 2022, the sudden collapse of two cryptocurrencies—Luna and TerraUSD—led to billions of dollars in losses and sent shockwaves through the market, striking fear in the hearts of crypto investors.3 Those fears turned into a full-blown panic in June that triggered cutbacks throughout the crypto industry while Bitcoin suffered its worst month in more than a decade.4
When the dust settled, this historic crash hurt millions of investors, forced several high-profile crypto lenders into bankruptcy, and wiped out more than $2 trillion of value from the crypto market.5,6 That’s not a typo. Two trillion dollars—gone! Bitcoin is currently hovering around $20,000 per coin and has lost roughly 70% of its value since reaching that all-time high in late 2021.7
What about the other big digital currencies—Ethereum and Dogecoin? Well, they took their share of losses too. After reaching about $3,520 in April, Ethereum tumbled below $1,000 in June.8,9 Dogecoin also fell from $0.17 to $0.05 from April to June—after an all-time high of $0.74 in May 2021.10 That’s the way the crypto cookie crumbles.
Why Is Crypto Crashing?
There’s no one reason for crypto’s dramatic crash and burn. But the biggest pieces of the crypto crash puzzle are inflation, recession fears, more regulation and government crackdowns on crypto mining, and fading confidence in cryptocurrency investments. When you put all those pieces together, it spells trouble for anyone who bet the farm on crypto.
Last summer, China’s central bank cracked down on cryptocurrency trading and mining kicking off crypto’s nosedive. Then in September 2021, things heated up even more when China announced it would ban all crypto mining and make transactions using crypto illegal.11 Yeah, they’re coming down hard on this stuff. So hard that China’s actions wiped out almost $400 million in value from the crypto market.12
What about inflation? The Bureau of Labor Statistics says the cost for all items rose 8.5% over the past 12 months.13 Food prices went up 10.9% and energy prices are up a whopping 32.9%.14 Translation? Everything is more expensive these days.
As inflation keeps chopping away at the purchasing power of the dollar, people start looking for investments or alternatives that can outpace the rate of inflation. Some people thought cryptocurrencies might be the answer, but the boom-and-bust nature of crypto shows it doesn’t have the consistency to beat inflation. You can’t trust in something that could lose more than half of its value in a matter of weeks!
That means confidence in cryptocurrency as an “investment” is starting to fade. Since the beginning of the year, trust in cryptocurrency has plummeted by 18% and more than one-third (36%) of crypto owners reported selling some of their Bitcoin in July.15
And when the value of a cryptocurrency is pretty much completely based on whether or not people believe it’s worth anything, losing trust is the worst thing that could happen to crypto.
Should You Invest in Crypto Now—Or Ever?
At this point, betting on a specific type of crypto feels more like gambling away your life savings at a craps table in Atlantic City than actual investing—it’s just too unpredictable for building long-term wealth. Plus, who wants to spend their time checking cryptocurrency prices every three seconds? Talk about anxiety . . . that’s the opposite of financial peace. Hard pass.
Okay, so what should you invest in? We’ve always been huge fans of investing your hard-earned dollars in good growth stock mutual funds. When you buy shares of a mutual fund, you’re buying bits and pieces of ownership in dozens or even hundreds of different company stocks.
That does two things for your investing portfolio. First, it gives you the benefit of investing in the growth potential of the stock market, which has historically had a long-term average annual rate of return between 10–12%. And second, it helps keep your portfolio diversified so your nest egg isn’t riding on one or two stocks or an unproven investment (looking at you, crypto).
Take your diversification a step further by investing evenly across four different types of mutual funds: growth and income, growth, aggressive growth, and international. That way, you’re even more protected from the ups and downs of the stock market!
It’s time to stop playing the Will My Crypto Crash? game and stick to the plan that’s helped millions of Americans become Baby Steps Millionaires! Millionaires didn’t gamble their futures on Dogecoin or a single stock. They invested consistently in mutual funds and in their 401(k)s and IRAs month after month, year after year. There are no shortcuts, people!
Work With an Investment Pro
If all this talk about crypto and investing still has you scratching your head, don’t worry—you don’t have to figure out all this stuff on your own. Our SmartVestor program can connect you with investment professionals in your area who can walk you through your investing options.
Find your SmartVestor Pro today!
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This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.