Bitcoin Falls to a 3-Month Low. Should You Buy on the Dip?

by Emma Newbery | Updated July 21, 2021 - First published on May 18, 2021

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Here's why Bitcoin's price has fallen and what it means for you as an investor.

The world's largest digital currency has fallen 18% this week. Bitcoin fell to $42,207 yesterday, the lowest it's been since Feb. 8. According to data from CoinMarketCap, it then rallied and finished the day at around $43,500.

What's behind Bitcoin's low?

There were several factors behind Bitcoin's fall, but the confusion caused by Tesla CEO Elon Musk's tweets had a considerable impact.

Elon Musk tweets

Bitcoin's price began to fall on Thursday after Musk announced Tesla was suspending Bitcoin purchases due to environmental concerns. The company's February decision to accept Bitcoin payments and buy $1.5 billion worth of the currency helped to push Bitcoin to an all-time April high of over $63,000. Concerns that Musk's crypto enthusiasm was cooling have had the opposite effect.

Over the weekend, speculation grew that Tesla had in fact sold all of their Bitcoin holdings. A tweet from someone who calls themself @CryptoWhale said: "Bitcoiners are going to slap themselves next quarter when they find out Tesla dumped the rest of their #Bitcoin holdings. With the amount of hate @elonmusk is getting, I wouldn’t blame him…" To which Musk replied, "Indeed."

It wasn't clear from the one-word reply whether Musk was agreeing with the sentiment or confirming Tesla had actually sold their Bitcoin. As a result, the price fell further. Yesterday, Musk cleared things up, posting, "To clarify speculation, Tesla has not sold any Bitcoin."

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Banks in India crack down on Bitcoin

News that India's central bank is discouraging banks from dealing with crypto exchanges also put pressure on Bitcoin's price. India's Supreme Court ruled in favor of cryptocurrencies last year, but according to Reuters, the regulator is uncomfortable with the speculative nature of crypto. It is also concerned about possible ties with money laundering.

U.S. Binance probe

Finally, the Commodity Futures Trading Commission (CFTC) said it would investigate Binance, one of the world's largest cryptocurrency exchanges. Binance operates a separate platform in the U.S. which complies with stricter regulations. It has a smaller selection of coins, a different fee structure, and fewer features.

Bloomberg reported that the CTFC wants to know if U.S. residents have been using the international site to buy and sell derivatives. Derivative investments -- betting on whether a commodity will go up or down -- are regulated in the U.S. Some think the move could reflect a tougher stance on the crypto industry as a whole.

Should you buy the dip?

As a new investor, it's near impossible to time the market and buy the dip. But if you've already done your research and decided you want to buy Bitcoin, now may be a good time.

Here are some questions to consider if you want to invest in Bitcoin:

  • What's your risk tolerance? Cryptocurrency investments are volatile and relatively untested. As a result, there's a chance of higher returns, but there's also an increased risk. This week shows that Bitcoin can fall by almost 20% in a short space of time. As an investor, this can be stressful. And that's not the only risk -- some warn that we're seeing a Bitcoin bubble and the market could crash completely.
  • Are you investing money you can afford to lose? It's much easier to handle the increased risk if you only spend money you can afford to do without. Don't take money from your emergency fund or your retirement account and put it into Bitcoin. That's money you may need to cover a financial emergency or live more comfortably in your old age.
  • Is Bitcoin part of a balanced portfolio? If you've already invested in stocks and shares, it may make sense to diversify your portfolio by buying cryptocurrency. It's better not to put all your eggs in one basket -- rather than investing all your money in cryptocurrencies, explore safer investments as well. That way if cryptocurrencies don't deliver, you won't lose all your cash.
  • Are you investing for the long term? Bitcoin is not a get-rich-quick scheme. The Ascent's parent company, The Motley Fool, owns Bitcoin. It does so because it believes in the long-term outlook for Bitcoin and is ready to ride out any dips in the market. If you want to buy, make sure you are comfortable holding for a good amount of time.

Bitcoin has slowly gained traction over the past 12 years. About 14% of Americans now own cryptocurrency -- and major brands like Starbucks and Amazon accept Bitcoin payments through third parties.

But it still has a way to go. It's likely the U.S. will announce increased regulation this year, and there are significant concerns about its energy consumption. Plus, the dramatic price swings make people nervous to use it as a currency. People don't want to pay for a pizza with Bitcoin only to find the dollar value changed before they finish eating.

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Those are just some of the reasons it's important to consider your investment carefully. It probably doesn't make sense to buy Bitcoin just because it's hit a three-month low. But if you've weighed the pros and cons and have the money ready to invest, now may be the right time to take the plunge.

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