Bitcoin’s price fell below $19,000 on Thursday, a near 5% drop over the last 24 hours. The largest crypto had been showing signs of recovery since it dropped below $18,000 on June 18 — its lowest price since December 2020 — but experts said it wouldn’t last.
“Bitcoin has not retested this level as resistance [$19,000], but if it does and rejects back down, this would be a very bearish signal,” says Marcus Sotiriou, market analyst at GlobalBlock, a digital asset broker.”This is because it would be the first time that this level has been broken on a long-time frame and could suggest an extended bear market is on the horizon.”
The leading crypto has been trading in a relatively tight range between $17,000 and $22,000 over the last few weeks as crypto and stock markets struggle to regain any notable upward momentum following May’s inflation report and Federal Reserve’s decision to raise interest rates. Experts also point to the continuous war in Ukraine and inflation hitting a fresh 40-year high for why we’re seeing slumping prices in the stock and crypto markets.
The crypto market has been increasingly tracking the stock market lately, which makes it even more intertwined with macroeconomic factors, experts say. Ethereum has followed a similar pattern.
The crypto crash has hit Bitcoin (BTC) particularly hard, causing it to experience its worst performance in the first half of any year since it was created in 2009 — enduring a loss of 59% so far in 2022. Over the past 24-hour stretch, the first and most valuable crypto tripped as low as $18,729 according to CoinMarketCap, falling well below the psychological price point of $20,000. Bitcoin has only done that one other time so far this year. While there are certainly several macroeconomic reasons for Bitcoin’s falling price, there are two key downard drivers that can’t be ignored.
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 surging inflation, ongoing uncertainty over the country’s lingering fight with COVID-19 and new regulatory actions by the U.S. government, including Biden’s recent executive order. 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 by some of the recent big drops. “I thought the market was maturing and these things would be less frequent and severe. Boy was I wrong,” he says.
Some of the 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.”
SEC recent rejection of another Bitcoin spot ETF application
Two days ago the SEC formally announced that it was not going to approve an application filed by crypto investing firm Grayscale for a spot exchange traded fund (ETF) in the U.S. Currently, several futures-based ETFs for Bitcoin are available to U.S. investors — but not a spot ETF.
A Bitcoin spot ETF would give investors direct access to purchase the crypto on the “spot” market at a real-time price. The futures-based ETF enables investing indirectly in Bitcoin using contracts to buy or sell BTC at a preset future date. Both a futures-based ETF and a spot ETF provide the benefits of investment diversity from a mutual fund with the trading flexibility of a stock.
Despite the downturn, a recent survey found that 72% of financial advisors are chomping at the bit for a Bitcoin spot ETF and would likely invest client assets in that type of financial instrument if available.
Bitcoin miners are selling BTC assets to cover rising expenses
The other key downward driver affecting BTC’s price is that Bitcoin miners continue to actively sell tens of millions of dollars worth of the asset on cryptocurrency exchanges. By flooding the crypto market with new BTC units, they’re increasing the supply and thereby decreasing the price per coin.
The reason for this selling pressure is that miners globally need the proceeds of those Bitcoin sales to cover spiking energy prices to run their power-hungry computing and cooling gear. The funds from BTC asset sales are also needed by U.S.-based Bitcoin miners to pay higher interest loans and debt service resulting from the Fed’s aggressive plans to continue raising short-term interest rates several times this year.
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, price swings 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.