Bitcoin Dropped Back Below $40,000
Bitcoin’s price dropped briefly below $40,000 Friday morning, though it appears to have recovered as quickly as it dropped.
Bitcoin had been holding steady above $40,000 in recent days, though its Friday drop was the first time it went back into the $30,000s since Feb. 4.
Before Feb. 4, Bitcoin hadn’t been above $40,000 since Jan. 20. Its drop below $34,000 on Jan. 24 marked the lowest Bitcoin’s price has been since July 2021.
While it appears to be back on the rise now, Bitcoin’s stalling price in recent weeks followed an announcement by Federal Reserve Chairman Jerome Powell that the Fed will begin raising rates at its next meeting in March to counteract continued rising inflation. More broadly, January’s big drop for Bitcoin — Ethereum saw a similar big drop — came amid the stock market’s worst month since March 2020, and after the release of the Federal Reserve’s long-awaited report on a possible government-issued digital currency.
Bitcoin’s price has been between $39,000 and $45,000 this week. Here’s how Bitcoin’s current price compares to its daily high point over the past few months.
The slumping prices continue to be influenced by surging inflation, a disappointing December jobs report and continued signs from the Fed that the central bank will begin winding down pandemic measures to support the economy this year.
After nearly hitting $52,000 on Dec. 27, Bitcoin has ranged between $33,000 and $50,000 in the days since.
Despite the recent slump, Bitcoin started 2022 on a relative high note, with a strong November and early December that gave way to the recent downward trend. After starting 2021 in the $30,000 range, Bitcoin increased throughout the year and hit its current all-time high when it went over $68,000 on Nov. 10.
The volatility and stalling price continues apace with new economic uncertainty over the Omicron COVID-19 variant, new statements from Federal Reserve Chairman Jerome Powell on the health of the economy, and ongoing comments from U.S. officials like SEC Chairman Gary Gensler on cryptocurrency regulation.
Despite falling back significantly from its latest all-time high price, many experts still expect Bitcoin’s price to rise above $100,000 at some point — describing it as a matter of when, not if. Shortly after Bitcoin’s latest all-time high, Ethereum marked its own new all-time high when its price went over $4,850. Ethereum, too, has seen similar volatility following the latest high.
What Does This Price Drop Mean for Crypto Investors?
For those who invest in crypto for the long-term using a buy-and-hold strategy, swings like this are to be expected. Big dips are nothing to be overly worried about, according to Humphrey Yang, the personal finance expert behind Humphrey Talks, who says he avoids checking his own investments during volatile market dips.
“I’ve been through the 2017 cycle, too,” Yang says, referencing the “crypto crash” of 2017 that saw many major cryptocurrencies, including Bitcoin, lose major value. “I know that these things are super volatile, like some days they can go down 80%.”
Experts recommend keeping your cryptocurrency investments to under 5% of your portfolio. If you’ve done that, then don’t stress about the swings, because they’re going to keep happening, according to Bill Noble, chief technical analyst at Token Metrics, a cryptocurrency analytics platform.
“Volatility is as old as the hills, and it’s not going anywhere,” Noble says. “It’s something you have to deal with.”
As long as your crypto investments don’t stand in the way of your other financial goals and you’ve only put in what you’re ultimately OK with losing, Yang recommends using the same strategy that works for all long-term investments: set it and forget it.
If this type of extreme drop bothers you, you may have too much riding on your crypto investments. You should only invest what you’re OK losing. But even if the drop is making you rethink your crypto allocations, the same advice still stands — don’t act rashly or upend your strategy too quickly. Reconsider what you might be more comfortable with going forward, such as allocating less to crypto in the future or diversifying through crypto-related stocks and blockchain funds rather than directly buying crypto (though you should still expect volatility when cryptocurrency markets fluctuate).
“Don’t check on it. That’s the best thing you can do. If you let your emotions get too much into it then you might sell at the wrong time, make the wrong decision,” says Yang.
What If You’re Interested in Crypto, But Haven’t Yet Invested?
Yang’s set it and forget it approach to crypto reflects his philosophy for investing in the traditional stock market, but some experts feel cryptocurrency is too different from traditional investments to draw any historical comparisons. That’s why A’Shira Nelson of Savvy Girl Money is staying well away.
Nelson primarily invests in low-cost index funds because “I can see history on that,” she says. The newness of cryptocurrency and lack of trackable data make her wary of these crazy swings.
Potential investors looking to buy the dip should understand that fluctuations are par for the course, and be prepared for this kind of volatility going forward. Even if you invest now, with prices relatively low, be prepared for them to fall even more. Again, only put in what you’re comfortable with losing — after you’ve covered other financial priorities, like emergency savings and more traditional retirement funds.
What’s Behind the Latest Bitcoin Drop?
Many investors see Bitcoin’s price swings as part of the game, but “volatility is tough for individual investors to deal with,” Noble says. Like Yang, he warns against selling too fast.
Recent price fluctuation has followed new uncertainty over the country’s lingering fight with COVID-19, new regulatory actions by the U.S. government, as well as the new legislation pertaining to crypto in the infrastructure bill. In an industry as new and unproven as cryptocurrency, it doesn’t take much to drive big swings in price. More generally, new short-term investors who are selling their holdings in reaction to the latest drop may be contributing to the drop in Bitcoin’s value, according to a report from Glassnode Insights, a blockchain analysis firm.
While fluctuations are expected, Noble says he’s been surprised if by drops earlier this year. “I thought the market was maturing and these things would be less frequent and severe. Boy was I wrong,” he says.
Some of this year’s drops have been caused by a combination of factors, Noble theorizes, from excitement about low-quality coins, to negative remarks from Elon Musk, to China’s recent crackdown on crypto services. This mix of factors has potential to make sell-offs “all the more violent,” says Noble.
He likens the drop to the stock market crash of 1987, from which the markets took months to recover. But because crypto moves a lot faster today than equities did in the 1980s, Noble says we may see a quicker recovery.
“Don’t panic and puke,” Noble says. “If you keep your positions small, you can try to tolerate the volatility.”