Growing crypto market
Crypto Market: After a sluggish few years, bitcoin exploded last December, setting a streak of new highs as risky investments rose in the aftermath of the US election. When Tesla (TSLA) announced that it would begin taking bitcoin payments for its automobiles, the craze went up the roof. Other major corporations, such as Mastercard (MA) and BNY Mellon (BK), the oldest US bank, have announced plans to enter the crypto market, indicating growing public acceptance.
After dabbling in GameStop (GME) in late January, many amateur investors were on the lookout for the next online obsession. 9.5 million users traded cryptocurrencies on the Robinhood app, which is popular among young investors, in the first 3 months of the year, up from 1.7 million in the previous quarter. Coinbase claimed 6.1 million active retail customers in the first quarter of 2019, which is more than double in the last 3 months of 2020.
The crypto market only grew crazier from there. Dogecoin, a cryptocurrency created by an internet joke picturing a Shiba Inu dog, shot up to an all-time high of over 74 cents last month. This attracted even more speculative investors, some of whom increased their stakes on spinoffs with little practical purpose.
New traders didn’t want to lose out after reading success tales online or through friends, according to Lisa Kramer, a finance professor at the University of Toronto who analyzes investor behaviors.
Then there was a big bang. Tesla CEO Elon Musk, whose cheerleading fuelled the ascent of Dogecoin, tweeted that Tesla will stop taking bitcoin payments owing to concerns about the environmental impact of mining them, and the market imploded. The ensuing sell-off knocked more than $410 billion from bitcoin’market value and roughly $25 billion from Dogecoin’s.
Some crypto believers, on the other hand, are adamant. According to data from researcher Glassnode, tiny investors in bitcoin — those holding between $37 and $37,000 — raised their holdings from roughly 4.8 percent to more than 5 percent of total supply during the current sell-off, suggesting increasing interest as prices declined.
The faithful have been encouraging one other to “buy the dip” so they can lock in future gains on the internet message board Reddit. Dogecoin, which plummeted as low as $0.22 during the recent sell-off, climbed back to $0.40 this week when Coinbase announced the beginning of trading for subscribers of its Pro service, albeit its price remains highly volatile.
According to Kramer, the disposition effect is a word used in academics to explain this occurrence. According to research, investors are more sensitive to portfolio losses than profits, and they tend to focus on the price at which they purchased an item. This is frequently a stumbling hurdle to getting rid of bad assets.
This temptation to hold on to underperforming stocks can cost the investor money in the long run, said Kramer. Kramer further added that Investors frequently make judgments based on gut instinct, but this can be dangerous.