Following the Federal Reserve’s decision to hike interest rates by 0.75 percent and a week of declining value, the price of Bitcoin dipped below $20,000 over the weekend, its lowest level since December 2020.
What does this new crash signify for investors, and how does it relate to past ones or even routine stock market drops?
The Impact of the Bitcoin Crash This Time
Price oscillations should be expected for long-term crypto investors that use a buy-and-hold strategy. Humphrey Yang, the personal finance expert behind Humphrey Talks, believes big market falls are nothing to be concerned about, and that he avoids reviewing his own accounts during severe market dips.
“I went through the 2017 cycle, too,” Yang says, referring to the 2017 “crypto crash,” which saw many major cryptocurrencies, including Bitcoin, lose a significant amount of value. “I’m well aware that these things are quite volatile, and that they can drop by as much as 80% on any one day.”
Cryptocurrency investments should be kept at less than 5% of your whole portfolio, according to experts. According to Bill Noble, chief technical analyst at Token Metrics, a cryptocurrency analytics platform, if you’ve done that, you shouldn’t be concerned about price swings because they’ll continue to occur.
“Volatility is as old as the hills,” adds Noble. “It’s a fact of life.”
Yang advocates employing the same method that works for all long-term investments: set it and forget it, as long as your crypto investments don’t get in the way of your other financial goals and you’ve only invested what you’re ultimately willing to lose.
You may have too much relying on your crypto investments if this type of dramatic loss upsets you. Only invest money that you are willing to lose. Even if the price decline has caused you to reconsider your crypto holdings, the same advice applies: don’t act hastily or drastically alter your plan. Consider what you would be more comfortable with in the future, such as allocating less to crypto or diversifying through crypto-related equities and blockchain funds rather than buying crypto directly (though you should still expect volatility when cryptocurrency markets fluctuate).
“It’s not worth checking on.” That is your only option. If you let your emotions to take over, you may sell at the wrong time and make the wrong judgment,” Yang warns.
What if you’re Interested in Cryptocurrency but Haven’t yet Made a Purchase?
Yang’s approach to crypto is similar to his stock market investing philosophy, but some experts believe bitcoin is too distinct from traditional investments to draw any historical analogies. That’s why Savvy Girl Money’s A’Shira Nelson is avoiding her.
Nelson prefers low-cost index funds because “I can see history on it,” she says. She is concerned of these wild swings due to cryptocurrency’s newness and lack of trackable data.
Potential buyers on the lookout for a bargain should be aware that volatility is unavoidable, and they should plan for it in the future. Prepare to lose much more money if you invest now, when prices are still cheap. Again, only invest what you’re willing to lose after you’ve taken care of your other financial goals, such as emergency savings and traditional retirement accounts.
What Caused Bitcoin’s Recent Decline?
Many investors consider price fluctuations in Bitcoin to be part of the game, but “volatility is difficult for individual investors to deal with,” according to Noble. He, like Yang, cautions against making rash decisions when it comes to selling.
Surging inflation, persistent uncertainty over the country’s lingering battle with COVID-19, and new regulatory moves by the US government, including Vice President Joe Biden’s recent executive order, have all contributed to recent price fluctuations. It doesn’t take much to cause significant price movements in a new and unproven market like cryptocurrencies. According to a report by Glassnode Insights, a blockchain analysis firm, new short-term investors dumping their holdings in response to the latest decrease may be adding to the decline in Bitcoin’s value.
While changes are to be expected, Noble believes some of the recent major decreases have startled him. “I had hoped that as the industry matured, these incidents would become less common and serious.” He says, “Boy, was I wrong.”
Noble theorizes that some of the decreases are the result of a combination of reasons, ranging from excitement about low-quality coins to Elon Musk’s harsh remarks to China’s recent ban on crypto services. According to Noble, the combination of circumstances might make sell-offs “all the more dramatic.”
He compares the decline to the 1987 stock market crisis, which took months for the markets to recover from. However, Noble believes that because crypto moves far faster today than stocks did in the 1980s, we may see a faster recovery.
Noble advises, “Don’t freak out and puke.” “You can try to handle the volatility by keeping your positions small.”