The world of digital currencies, known as cryptocurrencies, has been experiencing increased volatility lately. For example, the value of Bitcoin dropped by 28% in February, falling to just over $80,000 (£64,000) from nearly $106,000 (£84,000) the previous month.
What’s really going on here?
Investor confidence in cryptocurrencies initially soared at the beginning of the year, partly due to the endorsement from former President Donald Trump. However, this confidence took a nosedive in the following month as attention shifted elsewhere.
In an effort to restore confidence in the market, President Trump recently announced plans to make the United States the global hub for cryptocurrencies. He also revealed the introduction of a ‘crypto strategic reserve’ last Friday.
In other words, the federal government will stockpile crypto – and of the thousands on the market it is focusing on just five: Bitcoin, Ethereum, XRP, Solana and Cardano.
Then came the rebound and Bitcoin climbed back to more than $90,000 – not bad for a digital currency that was worth barely anything just a few years ago.
So is now a good time for potential investors to dip their toes in the digital waters, or do experts warn of troubled times ahead?
President Donald Trump has set up a US government-backed ‘crypto strategic reserve’
WILL THE REAL WINNER BE BITCOIN?
The biggest surprise to digital currency investors was that alternatives to Bitcoin are included in the federal reserve.
Ethereum, Solana, Cardano and XRP initially soared more than the 10 per cent enjoyed by Bitcoin. Ethereum and XRP were up about 11 per cent, Solana surged 25 per cent, while Cardano rocketed more than 60 per cent.
But by lunchtime today, although crypto values were still up, they had started to fall. Bitcoin was down by about 2 per cent, Ethereum 6 per cent, Solana and XRP both down 10 per cent, while Cardano has fallen by 13 per cent.
The presidential seal of approval does not necessarily add value, according to Chris Beauchamp, an analyst who studies cryptocurrencies at IG Markets. He says: ‘All this talk of crypto reserves got the market excited – it provides a veneer of respectability to initially boost values. But we have not seen any action yet. The fall off in prices indicates uncertainty over what will actually happen.’
He adds: ‘There is a sense that the inclusion of other cryptos – on top of better-known Bitcoin and Ethereum – indicates there are people with outside interests whispering in Trump’s ear.
‘Having a seal of approval from the President does not necessarily spell good news. The less well-known cryptos are far more illiquid – not so easy to trade.’
Experts are also suspicious of the timing of Trump’s weekend launch – when crypto markets were falling and investors not likely to be trading – meaning that price swings would have more momentum.
Danny Scott, chief executive of crypto trading platform CoinCorner, says: ‘It seemed a knee-jerk reaction to the crypto market going through a correction [a significant fall when perceived to being over-valued] – almost like making a political play to maintain support. Also, making it on social media on a Sunday, knowing liquidity is at its lowest as fewer people are trading, meant price swings would be greater.’
Although five cryptocurrencies are involved in the federal reserve, Scott believes the only real winner will be Bitcoin. He says: ‘This reserve should be Bitcoin only as it is a decentralised currency – with no company, country or individual controlling it. But a currency such as XRP is controlled by the US company Ripple. No other country will want a currency that is controlled by another nation.’
BUY NOW? IT’S LIKE CATCHING A FALLING KNIFE
‘Buying at such a time of volatility when Bitcoin has recently been going downwards is a bit like trying to catch a falling knife,’ says Glen Goodman, author of bestselling book The Crypto Trader.
‘I would buy when the currency stabilises and starts to go up.’
Goodman sold half his crypto holding at the end of last year, when Bitcoin first broke through the $100,000 barrier. He suggests that it may fall by two-thirds in value in 2025.
He says: ‘What I could not have predicted is that Trump would then launch his own coin in early January – as would his wife Melania – when he became President. He pulled a fast one and some people made an awful lot of money in the first few minutes of its launch, but the vast majority did not.
‘After the initial excitement I think the market felt let down – and this has added to a negative sentiment that has affected the market. Just look at [the cryptocurrency] Melania Meme – down 94 per cent. It looks a complete right-off. It casts a shadow on the market.’
RINSE AND REPEAT
Goodman follows a trading strategy of ‘rinse and repeat’ and buys when prices start rising and sells when going down. He says a key part of this approach is to have humility and be aware that you can get it spectacularly wrong.
He says: ‘It could be hell over the next few weeks and months, as people realise making money in this market is not easy.
‘My understanding is that Trump is going to use taxpayers’ money to buy tokens from crypto investors in the hope it will boost the market. This is a gamble.
‘The best years for Bitcoin soaring in value may be behind us.’
LOSSES ARE COMING THICK AND FAST – BUT DRIP-FEED SMALL AMOUNTS IN
Beauchamp believes that for many people who purchased crypto on a wave of excitement when Bitcoin smashed through the $100,000 barrier late last year, this will be the first time they will have realised they can lose money.
He points out that history has a habit of repeating itself.
Four years ago, in November 2021, Bitcoin was at almost $65,000. It then crashed the following year to $16,000 by November before climbing again. If a similar pattern was to repeat itself, Bitcoin could fall to $25,000 in value by the end of the year before there is a recovery.
Beauchamp says: ‘Any would-be investors should drip-feed small amounts of money initially to get an understanding of what is going on in the cryptocurrency market. For example, if you are thinking of putting in £500, consider putting in £100 now to scratch that itch and wait to see how it fares. You can perhaps add more over following months rather than put in one lump sum.’
Scott says: ‘As far as strategies for predicting the next dip are concerned for when to put in money, I believe you should pay little attention.
‘There is no point in losing sleep worrying about whether the price goes up or down in the short term. Much better to make regular payments, as in the longer term so far – despite the rises and falls – Bitcoin has continued to steadily go up in value over time.’
ARE YOU A ‘HODLER’?
Three-quarters of the 20million Bitcoins in existence are held by long-term buyers. Beauchamp says: ‘This group of people are known as “hodlers” – which stands for “hold on for dear life”. They might feel sick when markets fall, but over time their patience has paid off so far.’
DON’T LET EMOTIONS STEP IN
‘Remember, just like roulette, the house always wins. Making money in cryptocurrency should be viewed as a bonus,’ says Petr Chromy, a cryptocurrency trader for more than a decade.
He adds: ‘I have seen how greed has led to people being scammed, with new crypto launches causing unhappiness and with people becoming obsessed with the market.
‘The announcement by Trump that there will be a crypto reserve does not change the fact that it is still a gamble.’
The trader warns against getting too emotional about any cryptocurrency, as this can be dangerous.
‘Start by opening an account with a company such as Coinbase or eToro. Initially, rather than putting in money, learn about the market without spending anything. Watching price trends by looking at trader websites costs you absolutely nothing – and the knowledge you learn can be priceless.’
He warns that once you start to get cocky and think you are ahead of the game you are most likely to come unstuck.
Always be wary of buying out of greed – or selling in a panic. Treat it as money you can afford to lose.
He says: ‘My strategy is to set limits and never to get too crazy or too greedy.’
