Rising inflation, the war in Ukraine, and concerns about the economy all have hurt risky assets. That's because, when times are tough, investors tend to flock to the safest investments. As a result, the cryptocurrency market has suffered. Why is cryptocurrency risky? It tends to be volatile -- even in good times. And cryptocurrency is pretty new. We don't know what role the industry will play down the road.
The value of the entire cryptocurrency market has fallen to less than $1 trillion from about $3 trillion late last year. So, it's clear cryptocurrency investing may be giving you a headache right now. But that doesn't mean you should call it quits. In fact, here's one cryptocurrency mistake to never, ever make.
A lesson from history
And the mistake is... selling off all of your cryptocurrency holdings during a bear market. Let's take a look at why. First of all, bear markets and crashes are temporary. History tells us so. The market as a whole always bounces back.
Of course, as I mentioned above, cryptocurrency is a newish area. The very first crypto -- Bitcoin -- launched in 2009. By comparison, the Dutch East India Company became the first company to issue stock -- back in 1602 in the Netherlands. In the U.S., the New York Stock Exchange came to be in 1792.
So, with companies and their shares, we understand the ups and downs. We've seen them before. And we've seen solid companies suffer at times and recover. Cryptocurrency still is in its early days. It has the potential to reshape the way business is done. But will it? We don't yet know the answer.
This is why cryptocurrencies are risky. But this was the case even before the bear market. The external pressures on the market today don't reduce the potential of cryptocurrencies. The investment case for the strongest cryptocurrencies hasn't changed -- even if today they're declining.
For example, Ethereum (ETH +1.22%) has dropped more than 60% so far this year. At the same time, this crypto player remains the second biggest by market value after Bitcoin. And it's a leader in decentralized applications and non-fungible tokens. Again, today's economic worries don't change any of this.
CRYPTO: ETH
Key Data Points
If you sold your positions...
Now, let's take a look at the past performances of Bitcoin and Ethereum -- and what may have happened if you sold during difficult times. For instance, if you sold your positions in 2019 or 2020 after a decline and then a long period of stagnation, you would have missed out on the eye-popping performances of 2021. Bitcoin climbed 60% last year, and Ethereum soared more than 400%. As the following chart shows, cryptocurrencies have fallen sharply in the past and then gone on to gain.
Bitcoin Price data by YCharts
Right now, you might worry as you look at the performance of your cryptocurrency portfolio year-to-date. But it's important to remember this is a loss on paper. You haven't technically lost unless you've sold.
This doesn't mean you should hold onto every cryptocurrency in your portfolio. If you've lost faith in a particular player and think declines will only deepen, you might want to exit that position. But if you still believe in the story of a particular cryptocurrency, don't let the overall market environment scare you into a move you might later regret.
Instead, look at your portfolio through a long-term lens. With this perspective, the view might be a lot brighter. And you may avoid one of the biggest crypto mistakes.
