A report from crypto exchange Gemini found that one in five Australians (18%) invested in digital currencies in 2021.

Many would have discovered that the life of a crypto investor can be a bumpy ride.

Bitcoin, which accounts for 42% of the value of the top 250 cryptocurrencies, kicked off 2021 trading around $42,800. By April, it had risen to nearly $83,000.

Savvy investors who got in early could have doubled their money.

But for those who joined the crypto party in late 2021, the picture isn’t quite as bright.

At its peak in November 2021, the crypto market was worth nearly $3 trillion ($4.03 trillion). Bitcoin hit an all-time high of $88,000.

Just two months later, the crypto market plunged 40%, wiping out over $1.2 trillion ($1.6 trillion). Bitcoin plunged to $51,400 and is currently trading around $54,000.

Drastic fluctuations in value are nothing new for crypto.

The catch is that the fear of missing something often causes investors to pile in just when the market peaks.

We saw it in 2017, when Bitcoin pushed $25,000.

An analysis by Accenture found that Australian investors poured nearly $4 billion into Bitcoin that year. Nearly half of all trades were placed just days before the currency crashed to $11,000.

Risky business

How have 2021 investors fared?

The latest independent Cryptocurrency Reserve Index shows that less than six in 10 Australians (59.6%) pocketed a profit on crypto last year.

That left four in 10 to break even or heal financial wounds.

Single mother Vicki (who chose not to share her last name) was among those to join the crypto craze in 2021.

She claims to have “earned about $1000” on Bitcoin transactions.

But Vicki said: “I can’t recommend it – it was a nightmare.

“You have to treat it (investing in crypto) like a full-time job with the potential to lose a lot of money. It sounded too good to be true and it was.

The question is, what awaits us?

testing time

Cryptocurrencies face a variety of unknowns. One is the possibility of regulatory repressions in what is a largely unregulated market.

The biggest test might come down to simple economy. Rising interest rates and inflation are creating a new landscape for digital currencies.

Dr Shane Oliver, Chief Economist at AMP Capital, said “Bitcoin and cryptocurrencies have generally benefited from the collapse in bond yields and interest rates that has come with the collapse in inflation. “.

He added that the decline in interest rates and bond yields, which began in 2010, reduced the opportunity cost of holding digital currencies, making them more attractive to speculators.

“It has also been fueled by money printing, part of which has found its way into crypto speculation, partly driven by expectations that they will be a hedge against inflation.”

With rising bond yields and interest rates around the world, Oliver believes the opportunity cost of holding crypto is rising, which will reduce their appeal.

“Quantitative tightening sucks up the easy money that digital currencies have benefited from,” he said.

This is not to say that the crypto will not rise higher.

Investor surveys in the United States indicate that expectations for Bitcoin will reach over US$110,000 within the next five years.

But the 3.5 million Australians planning to get into crypto in 2022 could learn a lesson from the class of 21: only put in what you can afford to lose – gains aren’t guaranteed.