Bitcoin slips below $29,000. What this means for investors
Inflation remains near 40-year highs, which is not good for crypto prices.
- Bitcoin fell below $29,000 on disappointing inflation numbers.
- The collapse of Terra’s LUNA and UST has caused some jitters in the market.
- Investing in cryptocurrency is risky and the market could drop further.
Bitcoin (BTC) fell below $29,000 today. According to data from CoinMarketCap, it fell to $28,170 this afternoon, which is lower than it was at any time in 2021. While market leader Bitcoin has fallen around 8% in 24 hours, some of the top altcoins have fallen further. Last year’s crypto darling, Solana (SOL) was down over 30% at the time of writing, leading it down almost 75% since the start of the year.
Why is Bitcoin going down?
The main factor weighing on crypto prices is the impact of economic tightening measures aimed at reducing inflation. Last week, the Federal Reserve raised interest rates by 0.50%, the biggest increase in more than 20 years. This sent jitters across crypto and the stock market as investors retreated from riskier asset classes.
But there are a few additional factors playing into crypto prices today. Here are a few :
1. Inflation has not come down
The latest Consumer Price Index (CPI) figures were released today. They showed a slight drop in inflation, but the figure remains near 40-year highs. The inflation rate for April was 8.3%, down slightly from 8.5% in March. However, economists had hoped for a bigger drop. Crypto prices have fallen on fears that the Federal Reserve will react to the still high inflation figures by introducing even tougher measures.
Inflation is part of a larger economic and geopolitical backdrop that has pushed investors to safer ground. There are fears that drastic measures to curb inflation could trigger a recession, which would further depress stock and crypto prices.
2. Terra’s LUNA Collapse
Terra’s LUNA fell 98% last week after its stablecoin TerraUSD (UST) repeatedly lost its peg in recent market turmoil. The collapse of a relatively well-established crypto, especially one that has exploded in recent months, has severely shaken investor confidence. It also raised a number of questions about the stability of stablecoins and the lack of consumer protection.
Authorities have been pushing for increased regulation of stablecoins for some time. The rapid disintegration of Terra could accelerate this process and give lawmakers more reason to crack down on stablecoins.
What this means for investors
It’s one thing to know that cryptocurrency is a high-risk investment, it’s quite another to see the value of your portfolio decline by 50% or more. Cryptocurrencies are volatile and these ups and downs are part of the roller coaster of crypto investing. But that doesn’t make these dramatic drops any easier to digest.
It doesn’t help that cryptocurrencies don’t have the same track record as other assets. For example, equity investors may seek reassurance in a long price history that shows stocks have always recovered from these lows eventually. We only have 13 years of price history for bitcoin – although during this time the main crypto has consistently pulled back and hit new highs.
In the short term, investors should be prepared for further potential losses. Bitcoin may rally, but it may also fall further and it is best to be prepared for more bad news. Some investors see these dips as an opportunity to buy crypto at a discount, but a lot depends on your personal circumstances. If you are only investing money that you can afford to lose and are comfortable with the potential for further price declines, this may make sense.
Some investors might consider cutting their losses and selling. This is understandable. However, panic selling at a low level will only lock in your losses. If you sell now, you won’t be able to benefit from a possible recovery. If you still believe Bitcoin has potential, now is the time to hold on to that belief and keep your eyes on the long-term horizon.
At the end of the line
It’s not easy to watch your investments lose value, especially when many analysts are predicting further woes for the market. Many of last year’s extraordinary gains have now been erased, and there are no guarantees as to what will happen next. However, panic selling rarely produces good results. Take a step back and think about why you originally bought Bitcoin. If your thought is still true, it can help you weather the storm, even if it’s the start of a crypto winter.
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