Although we’ve already discussed why cryptocurrencies can have an upper hand against fiat, as responsible cryptocurrency users we must also take into account some of the downside risks. Prices won’t go north without any pullback, which requires a thorough analysis of some of the factors that might lead to falling cryptocurrency valuations. This year is very special since the world has to deal with a global pandemic and thus, investing decisions are severely altered by this variable.
Increased online fraud
The FBI, as well as other intelligence agencies, had already warned that as most economic activities moved in the online world, fraud had also increased. Cryptocurrency scams are on the entire and due to privacy and decentralization, scammers can hardly be found. It is important to remain ration and not get caught into crypto projects promising astonishing returns in a short period.
All these companies operate in the same way, without transparency and solid proofs to support their claims. For security and safety reasons, the best thing to do is to continue focusing on traditional tokens. Bitcoin, Ether, Litecoin, and other large-cap tokens are still trusted cryptocurrencies and benefit from their long-standing track-record.
Rising COVID-19 cases
In a recent article, we’ve warned that cryptocurrencies are vulnerable to COVID-19 uncertainty. As cases had continued to rise in the past two weeks, the crypto market had limited upside and most of the tokens were under pressure. Investors believe that prolonged influence from the pandemic will ultimately have a major impact on cryptocurrencies. Despite being uncorrelated instruments, they can’t remain decoupled from the broader financial markets. We should not forget that now we have derivatives based on crypto and institutional investors can influence how cryptocurrencies perform.
Subdued risk sentiment
Increased intervention for central banks had supported a strong rise in asset valuations since March, which had favored cryptocurrencies as well. However, there’s a limit to how much money printing can push prices higher, especially when the underlying fundamentals are deteriorating. It all results in a subdued risk sentiment which puts any bullish move under a question mark. Markets are fragile and at any point, negative news can wipe out significant gains.
With fiat under pressure due to aggressive monetary intervention, cryptocurrencies have better prospects in the longer run. However, over a short time frame, downside risks can prevail, resulting in losses for buyers. To buy-and-hold crypto, investors must spot the beginning of a new market trend higher, purchasing tokens when valuations are affordable.