3 Reasons Binance Coin Is Plummeting: Should You Buy Now?

Read this if you're thinking about investing in Binance Coin.

Binance Coin (BNB) is the utility token for the popular Binance cryptocurrency exchange. It also gets used to pay transaction fees on the Binance Smart Chain, an ecosystem with a decent number of projects in development. At the start of 2021, it sat in ninth place by market cap. By the end of the year, BNB had risen to third place.

All in all, BNB rose over 1,250% in 2021. That's a fantastic price gain, but it doesn't put it close to the year's best performers. So far, 2022 has been a different story. BNB is down almost 10% since the start of the year and over 30% on its all-time high in May last year.

Here are three reasons for Binance Coin's tumbling price.

1. The Federal Reserve is tightening monetary policies

During the pandemic, the Federal Reserve introduced a number of measures to limit COVID's economic damage. These included various forms of economic stimulus and reduced interest rates. However, inflation rose 7% last year and is at the highest it's been in 40 years. To address this, the Fed now wants to pull back on those economic boosters.

This means it will likely raise rates as early as March, on top of other forms of monetary tightening. This is happening faster than expected, and has unsettled stock markets and cryptocurrencies alike. As a result, some investors are pulling out of riskier asset classes like crypto.

2. The whole cryptocurrency market is down

Binance Coin is not the only crypto that's fallen in recent months. Almost all of the top cryptocurrencies have seen similar losses. Indeed, according to CoinMarketCap, the total amount invested in crypto has fallen from almost $3 trillion in November to about $2 trillion at time of writing.

3. Increased regulation could worsen Binance's regulatory headaches

The spectre of increased regulation hangs over the whole crypto industry. Many countries, including the U.S., want to introduce stricter crypto controls this year. But it still isn't clear what shape those new rules will take -- and how helpful or damaging they'll be to the industry.

The Binance exchange had considerable issues with regulators in 2021. A number of countries, including Japan, the U.K., Germany, Italy, Hong Kong, Malaysia, Lithuania, and Thailand, have tried to restrict its activities. At one point, customers in the U.K. couldn't make deposits or withdrawals to or from their bank accounts. It operates a separate site, Binance.US, in America with a smaller selection of coins and more limited functionality. The popular cryptocurrency exchange is making efforts to get international regulators on its side, but as pressure mounts in various countries, it may well be too little, too late.

Should you buy Binance Coin?

Binance Coin has a lot of things going for it. Not only is it the token for a popular cryptocurrency exchange, it's also a programmable crypto, so a number of applications and other cryptocurrencies are built on its network. That also means it has competition on all sides, from other smart contract cryptos to cryptocurrency exchanges.

The BNB token has a clear use case, which is important in the crypto world. Plus, Binance is an important industry figure. For example, it owns CoinMarketCap -- a much-used data provider.

Here are few questions to consider if you're thinking about buying Binance Coin at recent lows.

RELATED: Check out Motley Fool Money's list of the best places to buy Binance Coin.

Are you comfortable with its regulatory issues?

Most cryptocurrency projects will be impacted by new regulation. But Binance is more at risk because it is already in the crosshairs of a number of authorities around the world. Some investors also worry about why regulators are so focused on Binance. The fear is there's unknown information driving the regulators' suspicions. If so, the price might tumble when we learn more.

Have you researched the coin in detail?

Before you buy any cryptocurrency, you need to do your homework and make sure you understand the coin, its management, its business plan, and how it compares with the competition. Can it maintain its top-10 position or will it be overtaken by its competitors? Pay particular attention to the regulatory issues we mentioned above.

Are you investing money you can afford to lose?

When there's a dip in the price, it's tempting to put all your cash into crypto and hope for the kind of growth we saw last year. But we don't know when prices might come back up, and they could still fall further. This is a new and volatile industry, and the economic climate has changed. This makes it all the more important to only spend money you can do without. That way, if prices dip further, you can ride out the storm.

How does BNB fit into your overall investment strategy?

Diversification is important -- both for your crypto purchases and your overall investment portfolio. High-risk investments like cryptocurrencies should only represent a small proportion of your total investments. And, ideally, your crypto portfolio itself should contain a mix of coins. For example, you might keep a good chunk in Bitcoin (BTC) and Ethereum (ETH), and then look for a mixture of decentralized finance (DeFi), smart contract, metaverse, and other tokens. Cryptocurrency tokens often follow sector-specific trends, so a diversified portfolio gives you more protection if one specific sector falls.

The cryptocurrency world changes incredibly quickly. In 2021, many cryptos like Binance Coin gained over 1,000%, but it isn't clear right now if they can hold these gains in the year to come. As a long-term investor, what matters is how Binance might perform in the next five to 10 years, and whether you think it can continue to gain market share.