Bitcoin fell below $18,000 over the weekend before climbing back above $20,000.
Until the economic situation improves and the Fed eases its tightening measures, crypto is likely to continue to struggle.
The unfolding problems in decentralized finance are also affecting the bitcoin price.
Best Ascent crypto apps for 2022 (Bonuses, $0 commissions and more)
Bitcoin (BTC) is over 6% today after sliding below the all important $20,000 level over the weekend. According to CoinMarketCap, it fell to $17,709 before rising again to $21190 as of this writing. Still, this slight increase will be little consolation for investors who have seen their portfolios shrink in recent months.
Some analysts say that if bitcoin can hold its head above $20000, it could mean that crypto’s lead price has finally bottomed out. Understandably, people are anxious for this period of painful prices to end, but it’s too early to talk about a recovery. Bitcoin is down nearly 70% from its all-time high, and there are a number of clouds still on the crypto horizon.
Why Bitcoin is struggling
The main reason bitcoin is struggling is because the economic climate today is very different from the one that pushed the entire crypto industry to new highs last year. Economic tightening measures mean there’s a lot less money squelching around — and that has a huge impact on high-risk assets like crypto.
With inflation at a 40-year high, the U.S. faces a cost-of-living crisis. The Federal Reserve wants to reduce inflation and is using every tool at its disposal. Most recently, it introduced a big 0.75% rate hike, which played a big role in the latest bitcoin price decline. There could be another similar increase next month, eh. These drastic measures have raised fears of a recession, adding to Bitcoin’s woes.
Another important factor is the unfolding decentralized finance (DeFi) crisis. DeFi cuts the middleman out of the traditional banking business and offers interest-free loans, interest-bearing accounts and other services. The problem, as we are now discovering, is that it also eliminates various forms of investor protection and financial guarantees. For example, some platforms are so interconnected that their failure could cause a domino effect.
In May, the Terra-Luna ecosystem collapsed, wiping out about $60 billion in a short period of time. We’re still feeling the effects. More recently, lenders DeFi Celsius and Babel Finance froze withdrawals on their platforms, blaming extreme market conditions. There are also rumors of insolvency around crypto hedge fund Three Arrows Capital. The big question is, if one of these three falls, will the other platforms follow? The swirling uncertainty around DeFi is not helping the price of Bitcoin in the short term.
Is this the bottom?
After weeks of price declines, the slight increase we’ve seen in recent days is certainly a relief. But it is too early to talk about a bottom or any kind of recovery. For starters, the economic conditions that caused the drop are not over yet. Prices cannot recover while the Fed continues to raise rates and the specter of recession hangs over investors. In addition, the rumblings of the DeFi crisis are not over, and we don’t know what form the increased regulation of crypto will take.
If the reason you are wondering if bitcoin is at the bottom is because you want to buy Dip, there are a few things to consider. First, don’t rush into a decision. We are extremely unlikely to see a dramatic rally anytime soon, so you can afford to explore the major potential of crypto over the long term and consider how it fits into your portfolio. Make sure you understand the risks involved and only invest money you can afford to lose.
Second, make sure you are on top of your emergency fund and other financial goals. It may feel like a good time to buy Bitcoin at a discount, but it is more important to first get on top of things that will give you financial security and help you survive any upcoming economic turbulence. If you lose your job or face a medical emergency next month, it would be a disappointment if the money you need to support you was tied up in a speculative asset like crypto.
Finally, keep in mind that prices may continue to fall. One strategy that can reduce risk in these volatile markets is dollar cost averaging. This involves buying a certain amount of cryptocurrencies at regular intervals rather than one lump sum. For example, if you have $1,000 to invest, you could buy $100 of bitcoin at a fixed point each month or week. That way, you don’t end up waiting for the price to hit bottom and never invest anything. At the same time, if the price falls even lower, you won’t invest all of your money at the wrong time.
It is virtually impossible to know if bitcoin has bottomed. But with so much uncertainty in the market, there’s a good chance that prices will fall further. As a crypto investor, it’s important to take steps to minimize your risks and strengthen your non-crypto financial base. Right now, it’s the broader economic situation that has the biggest impact on cryptocurrency prices, so watch for signs of improvement there. This could be the first sign of a potential bitcoin recovery.