Bitcoin (BTC) dropped beneath $32,000 today, taking it to its lowest point in 10 months. Bitcoin's price is now worth half of what it was at its peak last November. At time of writing, Bitcoin had fallen almost 20% in seven days, taking it to around $31,400, according to CoinGecko data.
What's driving Bitcoin's plummeting price?
There are a few factors pushing Bitcoin's price down, but they can be summed up in one word: uncertainty. Uncertainty pushes investors out of speculative assets like crypto, causing prices to drop. It's not only crypto that's crashing. Stock markets around the world are also tumbling. The Dow Jones recently lost over 1,000 points in what was the biggest single-day drop since 2020. Similarly, the tech-heavy Nasdaq fell by almost 5% on Thursday.
So, what's behind the uncertainty? First, sky-high inflation and the measures central banks are using to bring it under control. Last week, the Federal Reserve raised rates by 0.50%, in what was the largest rise since 2000. It's also pulling back on various measures designed to stimulate the economy during the pandemic.
There's a concern about whether the Federal Reserve can reduce inflation without triggering a recession. The recent hike is likely to be the first of several such jumps, and some fear a so-called "soft landing" will not be possible. A soft landing is the shift to slower growth that avoids an economic crash. Geopolitical factors, such as the ongoing Russia-Ukraine conflict are an additional source of uncertainty.
What it means for investors
When people buy crypto, they often do so in the hope they'll generate significant returns. But there's a flip side to that coin -- high potential returns come with high risks. Still, these dramatic drops are hard for investors to stomach, especially those who bought Bitcoin for the first time last year.
Some may be tempted to cut their losses and sell today, which is understandable. However, if you sell now you will lock in any losses and you won't be in a position to benefit from any subsequent rallies. There are times when it makes sense to sell your crypto, but panic selling because of heavy losses is rarely one of them.
After extraordinary growth for the crypto market in 2021, the economic climate is now very different. Analysts predict that Bitcoin could continue to fall in the coming days, with some traders eyeing a bottom at $28,000. In short, we could see the crypto market erase many of its incredible gains from last year.
However, it's important not to put too much weight in these types of predictions. They are often made by traders who attempt to profit by identifying trends in price charts, and none of them have a crystal ball. For long-term investors, what matters more is where Bitcoin might go in the long term.
Don't panic sell
Holding during difficult times is one of the hardest things for investors to do, especially with an asset like crypto which generates so many polarized views. One thing to bear in mind is that this isn't the first time Bitcoin has seen significant losses. If you zoom out and look at Bitcoin's price action across the last five or 10 years, you'll see it has always gone on to recover and reach new highs. That doesn't mean a Bitcoin recovery is guaranteed, but it does put the recent losses in perspective.
Another way to survive the crypto crash is to focus on why you originally bought Bitcoin. Perhaps you think it could be the digital currency of the future, or you believe blockchain has the potential to transform our financial services. It's unlikely the recent price drop, which is largely due to wider economic conditions, will change that rationale. Indeed, Bitcoin took huge strides toward mainstream adoption last year, from increased institutional acceptance to a huge uptick in usage.
As a crypto investor, the recent price drops can be extremely worrying. The trouble is that fear often leads us to buy high and sell low, which flies in the face of investing logic. There are no guarantees about what will happen to Bitcoin and the crypto industry next. But, if you thought digital assets had long-term potential six months ago, remind yourself of that rationale now. If it still holds true, it's a reason to hold and wait out this drop.
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