4 Reasons Bitcoin Is Plummeting: Should You Buy Now?

The king of cryptos is down almost 40% since November.

Bitcoin (BTC) is the granddaddy of the cryptocurrency world. Its market capitalization represents about 40% of the total cash invested in cryptocurrencies, and it is by far the biggest and most established coin. Unfortunately, Bitcoin has had a tough few months. It's down about 8.5% since the start of the year, according to CoinMarketCap data. It's lost almost 40% of its value since its November high.

Here are four key reasons for Bitcoin's recent slump.

1. Uncertain economic conditions

There's a lot of uncertainty right now, which has caused the stock market and cryptocurrency industry to fall. On top of the omicron variant, the Federal Reserve said it's time to tighten monetary policy. This means it could raise interest rates as early as March. With less cash sloshing around, investors are pulling away from riskier asset classes like cryptocurrency.

2. Bitcoin's changing narrative

One reason people are interested in Bitcoin is they see it as a potential store of value, like gold. With a fiat currency like the U.S. dollar, the government can print more money, as has happened in recent years. But if there's more money in circulation, each individual dollar has less value -- $50 doesn't go as far toward your living costs as it did 10 years ago.

In contrast, there will only ever be 21 million Bitcoins. So if the dollar loses value and Bitcoin does not, Bitcoin should be a safer asset class. But critics argue this narrative doesn't hold water. If Bitcoin were a good hedge against inflation, its price would be increasing right now. The trouble is that inflation rose 7% in 2021 -- faster than it's risen in 40 years -- and Bitcoin's price is falling.

The other argument is that a good store of value needs to be something that's safe for the long term, not a volatile and speculative asset. However, Bitcoin bulls argue it's too early to tell. Bitcoin may well be a safe haven asset in the future, but there are too many other factors influencing its price right now.

3. Problems for Bitcoin mining

Faced with widespread protests about rising energy costs and various political issues, Kazakhstan's president declared a state of emergency and shut down large parts of the internet. Kazakhstan is responsible for about a fifth of all Bitcoin mining, which you need internet access for, but the internet in the country did not work for six days in January.

A number of Bitcoin miners moved their operations from China after it cracked down on crypto last year. They were originally attracted by Kazakhstan's cheap energy prices, but as the country now faces an energy crisis, it is reversing its mining-friendly stance. They may now need to move on again; the question is whether they'll go to places with lots of renewable energy, as Bitcoin's huge energy consumption is a major environmental issue.

4. Cryptocurrency is volatile

As a crypto investor, you need to be prepared for volatility. Bitcoin's price has seen several significant price drops as well as huge increases over the years. There are plenty of reasons for this, from the lack of regulation to the speculative nature of this asset.

The key thing is not to panic-sell during the drops and keep your eyes on the long-term horizon. If you only invest money you can afford to lose, it is much easier to weather the storms. As long as your initial reasons for buying Bitcoin still stand, you can afford to wait out any price drops.

What’s next for Bitcoin?

The economic climate is different than it was a year ago, and it simply isn't clear what will happen to crypto in a more risk-averse investment world this year. Plus, increased regulation is in the cards and that could still have a significant impact, especially in the short term. Longer term, regulation could build investor confidence and contribute to wider adoption, but that depends on what shape it takes.

On the plus side, Bitcoin adoption continues to grow. Several countries are considering following El Salvador and accepting Bitcoin as legal tender. More and more institutional investors have embraced Bitcoin and cryptocurrency, meaning there's more capital coming into the market. And, for retail investors, it's never been this easy to buy crypto. The applications are increasingly accessible, and cryptocurrency exchanges are more user friendly than ever.

That said, if you're trying to buy the dip, bear in mind we don't know whether Bitcoin's price has yet bottomed out. It could still sink further and may take time to come back, if indeed it ever does.

Should you buy Bitcoin?

Bitcoin is unlikely to produce the kind of eye-watering returns we saw from various altcoins last year. But the fact that it's been around for so long makes it more likely to survive a major market crash, and it's a much safer long-term bet than many less-established altcoins.

As to whether you should buy now, a lot depends on your personal situation, your understanding of crypto, and your attitude toward risk. If you don't have cash to spare or are worried about meeting other financial goals, now is not the time to buy crypto.

On the other hand, perhaps your emergency fund is topped up, you're good on retirement savings, and you were already considering buying Bitcoin. In that case, now might be a good time. It is certainly sensible to make sure Bitcoin represents a good chunk of your total cryptocurrency investments.

If you do decide to buy Bitcoin, try to think long term and ensure cryptocurrency only makes up a small part of your overall investment portfolio. That way, if Bitcoin does fall further, or the crypto market crashes completely, it will be disappointing, but not financially devastating.