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Crypto Crash: 3 Things You Need to Know

By Katie Brockman - May 28, 2021 at 1:51PM

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Whether you've invested or not, there are a few things to know about the latest crypto crash.

Cryptocurrency has been having a wild ride. After starting the year reaching staggering new highs and shattering records, it's now plummeting just as quickly.

Bitcoin (BTC 1.96%) and Ethereum (ETH 3.30%) are both down around 30% since mid-May, and Dogecoin has dropped by more than 40% in the same time frame. For investors who are new to crypto or are considering buying, this sudden crash may be nerve-wracking.

Whether you're thinking about buying, have already invested, or are simply curious about what's going on with cryptocurrency, there are a few things to know about the latest crash.

Bitcoin symbol falling apart and crashing.

Image source: Getty Images.

1. What caused it?

The crypto crash appeared to come out of nowhere, but there were a few factors that led up to it. For one, Tesla CEO Elon Musk announced that the company was suspending its acceptance of Bitcoin as a form of payment due to concerns over its impact on the environment.

In order for Bitcoin to succeed over the long term, it needs widespread adoption from merchants. When Tesla announced earlier this year that it would start accepting Bitcoin, crypto supporters were excited that this may mean other companies would follow suit. Now that Tesla has backtracked, many investors are concerned that Bitcoin will have a harder time gaining acceptance -- especially considering Musk has been one of Bitcoin's most prominent supporters.

Around the same time as Tesla's announcement, China began cracking down on cryptocurrency as well. While China has discouraged crypto for years, it recently revealed that it was imposing heftier penalties for Bitcoin mining -- the process of creating new Bitcoin tokens. Bitcoin mining has long been concentrated in China, and the country's crackdown could affect the global crypto market.

2. Is this unusual for crypto?

While the current crypto crash may be unsettling, it's nothing that cryptocurrencies haven't experienced before. Crypto has always been subject to extreme volatility, so this is not necessarily a new phenomenon.

In fact, even the biggest names in crypto, Bitcoin and Ethereum, have taken tumbles much worse than the current downturn. The price of Bitcoin has plummeted by roughly 80% in the past, and Ethereum once lost more than 90% of its value over the course of a year.

Ethereum Price Chart

Ethereum Price data by YCharts

Cryptocurrency is one of the most volatile types of investments out there, so plunges like these shouldn't be too surprising. Many experts also believe crypto has been overvalued, so it was only a matter of time before the bubble burst.

3. Is it likely to recover?

Despite their dramatic downturns, the major cryptocurrencies have consistently recovered from their slumps. Both Bitcoin and Ethereum went on to see their prices increase exponentially after losing 80% and 90% of their value, respectively.

Even considering the current downturn, Bitcoin's price is still up more than 300% over the past year. And Ethereum is up by a staggering 1,150% in the same time period.

That said, there are no guarantees that cryptocurrencies will always recover from their crashes. Crypto is still a highly speculative investment, and it may or may not succeed over time. So if you're thinking about investing, keep in mind that there's always a chance that someday crypto won't be able to bounce back.

Cryptocurrency is a high-risk investment, and it's proven yet again that it's no stranger to volatility. If you're considering buying, right now may be a good opportunity because prices are lower. Just be sure you know what you're getting into because, while crypto can be lucrative, it's not the right investment for everyone.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin and Tesla. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Ethereum Stock Quote
$1,778.62 (3.30%) $56.79
Tesla, Inc. Stock Quote
Tesla, Inc.
$871.27 (0.78%) $6.76
Bitcoin Stock Quote
$23,894.04 (1.96%) $459.96
Dogecoin Stock Quote
$0.07 (1.95%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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