Bitcoin Dropped Back Below $30,000 Friday. Here’s What Investors Should Do
The leading crypto has been trading in the red over the past few weeks, dropping down as much as 20% last week.
“Bitcoin was dragged down alongside most risky assets as Wall Street suffered the worst loss in almost two years,” Edward Moya, senior market analyst at foreign-exchange brokerage Oanda, wrote in a market analysis memo on May 19. “Bitcoin remains a risky asset and vulnerable to further pain if the de-risking continues tomorrow.”
The crypto market has also been increasingly tracking the stock market lately, which combined with more mainstream adoption and the slumping prices we’ve seen to start the year, makes it even more intertwined with macroeconomic factors, experts say. Ethereum has followed a similar pattern.
That means factors that traditionally affect stock markets — like rising inflation, geopolitical crises, and concern over tighter monetary policy by the Fed — are also affecting the crypto markets right now. The Fed delivered the first-rate hike in 22 years on May 4, in an effort to combat inflation, which slowed to 8.3% in April, according to the latest inflation report.
Some experts also believe that TerraUSD (UST), one of the largest stablecoins, played a role in Bitcoin’s crash last week. UST is intended to be pegged to the $1 but it sank as low as 12 cents and collapsed in a pseudo-bank run as investors panicked and sold off their tokens. The Terra blockchain has since officially halted.
The last time Bitcoin briefly spiked above $40,000 was on May 4 after the Fed’s announcement, but those gains were short-lived. Bitcoin had been trading in a tight range for several weeks, primarily hovering between $26,000 and $31,000.
Bitcoin hasn’t been above $50,000 since Dec. 25, 2021. Despite the ups and downs, Bitcoin has stayed above its January low point below $34,000, which was the lowest it had been in the previous 6 months. Bitcoin’s price has seen a 40% drop in value since its all-time high above $68,000 on Nov. 10, set back by surging inflation, lagging recovery in the job market, and the Fed’s ongoing signals that it would begin winding down pandemic measures to support the economy.
Bitcoin’s price has been between $28,000 and $31,000 so far this week. Here’s how Bitcoin’s current price compares to its daily high point over the past few months:
Though it has had a slow start to the year, Bitcoin still entered 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.
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 in November, Ethereum marked its own new all-time high when its price went over $4,850. Ethereum has seen similar volatility following the latest high.
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.”
