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Crypto is a volatile asset, so it's a good idea to know how much you can afford to lose.
Some crypto crashes are because of systemic issues within crypto, such as the collapse of FTX.
Other times, macroeconomic factors such as interest rates and inflation can push values down.
Crypto investors got a rude awakening in August. After a period of relatively calm markets, major cryptocurrencies saw a significant selloff. Bitcoin lost more than 10% of its value within the span of a few days.
Among the factors being blamed for the most recent decline is the decision by Elon Musk's Space X to sell off a big chunk of its Bitcoin holdings . But given its track record, Bitcoin's volatility will likely continue, and investors should buckle up.
Though the factors driving each crypto crash are different, it can be helpful to remember a few established investing principles, like choosing how much of your overall portfolio should be invested in crypto and remembering why you invested in the first place.
The latest market shock is another jarring bump in the road for cryptocurrency, which has seen its value plummet since the highs of 2021. Here's a rundown of a few of the factors that have been driving uncertainty and volatility so far this year.
» Learn more: How to buy cryptocurrency
What can cause a crypto crash?
Crypto prices can be dramatically affected by major events, such as exchanges or coins crashing. They can also sink with higher interest rates, rising inflation and other macroeconomic factors that can affect how confident people feel investing their money in risky alternative assets.
Regulatory factors and financial enforcement actions like those carried out by the SEC can also affect the market.
And when prices fall rapidly, that can compound the pressure on the market by forcing some investors to free up cash so they can meet other obligations.
In the case of the collapse of crypto exchange FTX in 2022 , the impact to the market was enormous. The FTX crash didn't just affect FTX, but also cryptocurrencies FTX heavily invested in (such as Solana) and firms FTX did business with.
The crypto exchange BlockFi, which received a line of credit from FTX.US and was set to be acquired by the company later in the year, froze withdrawals before filing for bankruptcy itself a few weeks after FTX did.
» Is Bitcoin a good investment? Learn about the pros and cons
Has crypto crashed before?
Yes, multiple times. For example, Bitcoin recorded a previous record high of nearly $20,000 in December 2017, but by December 2018 was trading below $3,500. It reached an all-time high of about $69,000 in November 2021 and in the year since dropped by more than 75%.
» Learn more: Will Bitcoin go back up?
I’m worried about keeping my crypto with an exchange. What should I do?
Consider moving your digital assets to a separate crypto wallet. Most exchanges allow you to transfer assets to these wallets, which can be online (on a separate platform) or offline (on a thumb drive with added security features).
What are the risks of buying crypto?
When crypto is crashing, someone who's been intrigued from the sideline might think this is the time to get in and "buy low." But while prices can recover — and have done so in the past — the recovery could take months or years.
Conditions might also get worse before they get better. Following a major crash, prices could also continue to go down for some time, especially if the event causes financial troubles for other exchanges or currencies.
Unlike traditional financial exchanges, crypto markets don't have circuit breakers, which automatically pause trading when prices dive too quickly. This means prices could plunge much faster than traditional investments.
Another distinction between crypto and securities such as stocks is that crypto trades around the clock. If you're worried about swings in value, you might find it hard to sleep.
There's also a chance any given cryptocurrency could go to zero, or close to zero, following a massive sell-off. Such was the case with Terra and Luna.
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How does crypto fit into your portfolio?
As a rule of thumb, don't invest more than you can afford to lose in risky assets like crypto. It's recommended not to invest more than 10% of your portfolio in such assets.
» Learn more: How to position your crypto portfolio in a down market
Disclosure: The author Andy Rosen owned BTC at the time of publication. NerdWallet is not recommending or advising readers to buy or sell BTC or any other cryptocurrency.