The value of cryptocurrencies has plummeted spectacularly in weeks and months, and it seems the bottom is lower than anyone expected. Most recently, US-based crypto exchange Binance announced that it planned to buy rival exchange, FTX trading - before pulling out 24 hours later - sending shockwaves through the investing world, with anxious investors pulling out their crypto funds. Along with the company, several cryptocurrencies have taken a hit recently.
It has been on a downward trajectory since its record high of $69,000 in November 2021 for BTC and altcoins. So should you run a mile or have faith that Bitcoin will recover? Before we dive deep into what's happening and whether you should buy Bitcoin while it's below $20,000, let us understand the fundamentals.
What Is Bitcoin, And How Does It Work?
Cryptocurrencies like Bitcoin are digital assets that operate like normal currency but with notable differences. They use peer-to-peer payment methods without the banks taking a cut with every transaction. There are no physical versions of the coins either. Each bitcoin is created (or mined) using an encrypted code, a string of numbers, and letters. The same equation used to create the code can “unlock” it (like a virtual key).
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Why Has Bitcoin Dropped Recently?
The price of bitcoin and several other leading cryptocurrencies have been on a downward trajectory in 2022.
Rising inflation and interest rates have caused the cryptocurrency to fall along with stocks and shares as investors dial down the risk level they are taking.
In November 2022, the price of bitcoin fell below $16,000, according to Coinbase. One Bitcoin is now worth around $16,435. That is a long way from the all-time high of $69,000 seen in November 2021.
The recent turmoil has been caused by the following:
- The collapse of major cryptocurrency exchange FTX after it struggled to find a buyer to rescue it
- Uncertainty around rising interest rates in the US and UK, causing a sell-off in risky assets
- A “cost of living crisis” caused by rising inflation means that investors have less disposable income to spend on buying bitcoin and other cryptocurrencies.
- China making cryptocurrency transactions illegal.
- Suggestions that Russia could ban cryptocurrency trading and mining, causing prices to plummet
Is ‘Buy the Dip’ A Good Strategy?
The principle of ‘buy the dip’ is based on an assumption price drops are temporary aberrations that correct themselves over time. Dip-buyers hope to exploit dips by buying at a relative discount and reaping the rewards when prices rise again.
Crypto markets are volatile, so buying cryptocurrencies at any price — let alone a dip that might become a long-term trend — is risky. While prices could return to previous levels, they could also fall even further, leaving your investment underwater.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Will Bitcoin Bounce Back From This Slump?
If the past is prologue, then the current dip (or crash, depending on your perspective) could bounce back as it did last year, when prices fell to similar levels before returning to pre-dip levels and even peaking in the autumn. But of course, they might not.
Bitcoin prices, in particular, have shown a degree of seasonality to date, appearing to fall in value to lesser or greater extents in the autumn before bouncing back in early winter. However, as with every kind of investment, let alone the unpredictable world of cryptocurrencies, past performance is no guarantee of future results.
Should You Invest Right Now When Bitcoin Is Below $20,000?
Bitcoin is extremely volatile and high risk. It’s certainly not a good idea to invest all of your savings in cryptocurrency.
If you are willing to take the risk, first make sure you understand what you are investing in and have a crypto investment strategy.
Also, make sure you are not investing because you have a fear of missing out. There are a number of questions you should ask yourself before getting involved:
- Do I understand what I am investing in and how bitcoin and the crypto market work?
- Am I happy with the level of risk?
- How much more expensive is it now compared to a few months ago? If so, why do I want to buy a thing because its price is higher? Where else in my life do I do that?
- Is there any evidence to suggest prices could rise even higher?
- If I buy it now with a view to selling it for even more later, who will buy it from me for that higher price, and why?
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
The Ups And Downs Of Bitcoin
Bitcoin is hailed by fans as a market-disrupting liberation and demonized by many personal finance experts as a dangerous creation. One thing's for sure is that Bitcoin is volatile.
Since December 2020, Bitcoin has enjoyed a theatre of dramatic ups and downs. The problem is that the price of cryptocurrencies is not underpinned by any intrinsic value. It is determined by various social factors. So if you decide to invest, be prepared for a bumpy ride.
Should I Invest In Bitcoin? Bottom Line
Bitcoin and the crypto revolution are no longer nascent. With the length of the blockchain continuing to grow and decentralized finance (DeFi) gaining ground over traditional finance, this new asset class is reshaping the investment landscape.
We think Bitcoin is a worthwhile long-term investment. However, we also note that bitcoin is extremely volatile. That means it experiences large price movements over short periods. Therefore, before investing, you must understand the risks involved: you could lose all or a large portion of your investment. Only invest money that you can afford to lose.
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