Crypto Prices Recently Hit Two-Year Low. Is It Finally Time to Buy?

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  • Bitcoin recently dipped below $17,000 for the first time in two years.
  • The collapse of FTX has seriously shaken investor confidence and it could take a long time before prices recover.

Expect further crypto volatility -- prices could fall even more.

After six months of relative stability in the crypto market, some investors had dared to relax and think that the worst might be over. Bitcoin (BTC) has been hovering around $19,000 to $20,000 since around June in spite of recession warnings and ongoing economic turbulence.

However, if there's one thing that's certain about crypto, it's that it can always surprise us. Bitcoin dipped below $17,000 recently as the market digested the news that leading crypto exchange Binance would buy rival FTX because of liquidity issues. Binance has since pulled out the deal after doing its due diligence. Since the deal fell through, FTX has announced that its founder, Sam Bankman-Fried, has resigned. The company has also filed for Chapter 11 bankruptcy.

Brutal times for crypto investors

The collapse of a key player has further damaged investor confidence and sparked fears of contagion. At time of writing, CoinMarketCap data priced Bitcoin at around $17,500. The overall crypto market cap sits at around $880 billion -- a far cry from nearly $3 trillion last November.

One concerning piece of news is a Bloomberg report that Binance executives have found a $6 billion hole in FTX's finances. FTX.US is a separate entity and in theory users won't be impacted, but there's a lot of uncertainty right now.

Is it finally time to buy?

If you haven't yet bought Bitcoin or another cryptocurrency, you might be thinking that the recent crash is an opportunity to enter the market. Or perhaps you already hold crypto and wonder if a two-year low could be a good time to pick up some more.

The trouble is that the FTX news raises questions about the entire industry. Terra's collapse earlier this year shook investor confidence, but this is even higher on the crypto Richter scale. Lark Davis, a popular crypto YouTuber, compared it to the collapse of Lehman brothers. Arcane Research says it's, "A defining structural shift to the crypto market." In short, there's probably worse to come.

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Here are some of the storm clouds still lurking on the horizon.

1. Other crypto platforms and projects could still fail

In fairness, we don't yet know the full picture. But it seems as if FTX wasn't being completely transparent about how it managed customer funds. According to Bloomberg, the Securities and Exchange Commission and the Commodity Futures Trading Commission are both investigating.

FTX and Alameda Research are huge names in crypto, and the man behind both of them, Sam Bankman-Fried, is somewhat of a crypto rockstar. The FTX news raises the question: If we can't trust Bankman-Fried, what about the rest of the industry? We simply don't know what goes on behind the scenes at a number of these crypto projects.

Main takeaway: Other crypto exchanges could also be on the edge of as yet undisclosed liquidity issues, and more of them could fail.

2. FTX's collapse could shake major cryptos

When one crypto institution fails, it has a ripple effect onto other platforms and projects. In this case, pay attention to the projects where Alameda Research has invested heavily. These include Solana (SOL) and 1inch Network (1INCH).

Main takeaway: We don't yet know how big the fallout from FTX's collapse will be.

3. We still don't know what impact increased regulation will have

There's a lot of debate around how regulation could change the crypto world. Some argue it will help to strengthen the industry's foundations and inject some much needed reassurance for investors. Others say it goes against the decentralized ethos of crypto, or that it will stifle innovation and make investing difficult for retail investors. A lot depends on the shape of any regulation and each high profile crypto disaster makes stricter regulation more likely.

Main takeaway: Increased regulation could cause further short-term price disruptions.

4. We could be about to enter a global recession

One of the reasons cryptocurrency prices soared to extraordinary highs in 2021 was that there was a lot of money sloshing around the economy. The situation now is very different. The Federal Reserve has been aggressively raising interest rates in an effort to curb inflation, causing investors to pull away from risky assets like crypto.

Around the world, people are prioritizing savings and debt payments over other financial goals as they prepare for a potential recession. Crypto prices may recover eventually, but right now people are worrying about their jobs and keeping food on the table. It's unlikely we'll see a return to last year's bull market until the economy recovers.

Main takeaway: Crypto prices aren't likely to recover any time soon.

Know the risks

If you're thinking of buying crypto, a two-year low could be a reasonable time to do so. However, it's important to understand the risks involved and know that prices could still crash further. If you don't have an emergency fund that can cover three to six months' worth of living expenses or are carrying high interest debt, prioritize these over any crypto investments.

If you do decide to buy, make sure you only invest money you can afford to lose and that crypto only makes up a small percentage of your portfolio. If you're worried about using an exchange that subsequently fails, look into crypto wallets that let you fully control the crypto you own. Managing risks is an essential part of crypto investing and today's news is another example of how big those risks can be.

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