At the moment, the crypto market is going through a delicate phase, in which major declines have been recorded in almost all cryptocurrencies, mainly driven by Bitcoin’s decline.
In May this year, in fact, Bitcoin saw its value drop about 50% compared to previous months. The slump continued in June, where the world’s most popular cryptocurrency reached a value of $19,217.81-a value this low has not been seen since December 2020.
But what is happening to the crypto market?
This phenomenon is part of one of the most frightening factors in the world of cryptocurrencies: their high volatility. However, experienced investors know that volatility is a normal phenomenon in any market.
The concern about volatility also significantly invests many nonprofit organizations that decide for this reason not to consider the possibility of receiving donations in cryptocurrencies.
But can volatility be an opportunity for the nonprofit sector? How should organizations seeking to attract crypto-philanthropists to their cause behave?
Volatility, Bear Market, Bull Market: what do these terms mean?
Let’s start with a brief discussion of the terms needed to understand what is happening in the crypto world now. The most important terms to remember are three:
- Volatility;
- Bear Market;
- Bull Market.
Volatility
Volatility refers to the ease with which the price of a certain asset (in this case a certain cryptocurrency) varies over a short period of time. If the price varies rapidly, it is said to have high volatility.
What is volatility affected by?
Just as with traditional markets, the volatility of cryptocurrency prices is influenced by economic and political events involving different countries and by the circulation of news concerning just such events. These include, for example, rising inflation and the outbreak of war in Ukraine.
Bear Market and Bull Market
A Bear Market is when prices related to a certain market are shown to be falling. The phase we are going through now, in fact, is precisely that of Bear Market.
During this phase many investors tend to feel frightened by the falling value of their cryptocurrencies. However, most experts know that this is only a phase, and that a Bear Market period will certainly be followed by a Bull Market period.
Bull Market, as opposed to Bear Market, in fact indicates a rise in the value (and prices) of assets in a certain market.
Bull Market and Bear Market tend to follow each other in continuous cycles that are influenced by geopolitical factors and market corrections. For this reason, several investors see the Bear Market as a key opportunity to invest in order to benefit from the future price growth that will occur in the Bull Market phase.
Why is the volatility of crypto so worrisome?
The general perception about cryptocurrencies is that, compared to traditional markets, they have much higher volatility. This would make them an asset in which it seems more dangerous to invest.
In reality, the higher volatility of digital currencies is due to the fact that the crypto market is characterized by lower liquidity than traditional markets. What does this mean?
The liquidity of a market refers to the amount of investors available to trade certain assets.
For example, if we own tokens of a cryptocurrency and wish to sell them, it is important to assess the liquidity of the market. If liquidity is too low (and, therefore, there are not enough investors willing to buy our tokens) we will be forced to lower the price at which we are selling. This necessity to lower the selling price then goes to affect the volatility of the market.
Since the popularity of cryptocurrencies is still growing, it is normal that the liquidity of this market is lower than in more traditional markets populated by many investors.
All this leads to the perception that cryptocurrencies are a risky investment: high volatility is associated with the possibility that the value of a certain token will drop rapidly.
However, especially for nonprofits, it is important to be aware of two factors.
1) A Bear Market phase is always followed by a Bull Market phase
This is demonstrated to us by the incredible rise that Bitcoin exhibited after touching one of its lowest values in July 2021. Last summer, in fact, the currency created by Satoshi Nakamoto reached a value of $29,000.
However, its value quickly managed to rise again until, in November of that year, it reached its highest value ever, reaching $68,000.
Many savvy investors manage not to get caught up in so-called “panic selling” when price declines are observed. Panic selling consists, as the name suggests, of selling one’s assets due to the fear that the value of those assets (in this case, a cryptocurrency) is dropping significantly.
In fact, it is precisely panic selling, in many cases, that exacerbates the severity in value collapse. For this reason, in Bear Market phases it is important to remain calm and remember that after a down phase, there will most likely be an up phase.
2) The volatility of cryptocurrencies is one of the reasons why investors prefer to donate crypto
The moment an investor decides to convert the cryptocurrencies he or she has accumulated into cash, he or she is obliged to pay taxes to cash out his or her money, taxes that can add up to substantial amounts.
Especially in America, where taxation is governed by IRS guidelines, donating a portion of one’s wealth in cryptocurrencies to charity is the most efficient and immediate way to lighten one’s tax burden.
How do donations change during the Bear Market?
The general impression that a nonprofit might have during this Bear Market period is that donations are decreasing.
In fact, donations may be slowing down during this period, but the Bear Market time presents an opportunity for both savvy investors and nonprofits.
The Bear Market phase, as we pointed out earlier, is when many investors decide to buy new assets rather than sell them, taking advantage of the decline in price during this phase to enjoy the benefits of the rise in value during the Bull Market.
With that in mind, this is the time when nonprofits can work on positioning themselves consistently in the world of cryptocurrency. This time is ideal for making themselves known to new donors, creating a relationship that will prove fruitful when values rise again.
What should nonprofits do?
As the crypto-fundraising platform The Giving Block suggests, now is the time for nonprofits to cultivate their relationship with donors. To do so, they can take action in several ways.
Interact with donors
This is the stage when interaction with donors is most valuable. It is important to explain one’s mission, values, and simultaneously emphasize the great impact that even a small donation can have.
From a communication perspective, the ideal is to affirm and demonstrate what a nonprofit organization can gain from a certain donation.
Establishing a solid and ongoing interaction with those who invest in crypto will make investors remember a particular nonprofit, especially at a time of positive market recovery.
Educate donors
Less experienced investors (and potential donors) may feel frightened by the Bear Market phase.
At this time, a nonprofit can help reassure them by informing them that the Bear Market represents a normal phase of fluctuations in all markets. In addition, you can inform investors of the tax benefits of cryptocurrency donations.
Targeting NFT projects
As The Giving Block also pointed out, although this is a time when the value of cryptocurrencies has fallen, NFT sales have not stopped.
We have already talked about how NFTs are one of the most effective and innovative tools for fundraising. The reasons are many, but enthusiasm for NFTs is still solid and they can become an important vehicle for donations to nonprofits.
Leveraging self-conversion
Among the most common reasons why nonprofits are reticent to open themselves up to the possibility of donating cryptocurrencies is the fear that as they receive crypto donations, the value of those donations will suddenly plummet.
To avoid this problem, many donation platforms that allow to receive cryptocurrencies provide an auto-conversion service to US dollars. This way, charities will not have to worry about the volatility factor at all.