- After a brief rally yesterday, Bitcoin's price fell almost 10% today.
- Economic tightening measures could continue to impact crypto prices in the short term.
Is Bitcoin's biggest intraday drop since January a buying opportunity?
Bitcoin's (BTC) price fell almost 10% in just 14 hours today, its largest intraday drop since January. As is often the case, where Bitcoin goes, the rest of the market follows. Crypto's market cap -- the value of the whole crypto market -- fell about 7%, according to CoinMarketCap. It was around $1.8 trillion yesterday and is now at $1.67 trillion.
What caused Bitcoin's price slump?
Yesterday the Federal Reserve raised interest rates by 0.50%, the biggest hike since 2000. The markets initially reacted well, in part because some feared an even bigger rate hike of 0.75%. Investors also took heart from Federal Reserve Chair Jerome Powell's cautious confidence that inflation could be brought under control without triggering a recession. However, it looks like that optimism was short lived.
Prices of equities and crypto fell dramatically today as the market digested the interest rate hike and the implications of a hawkish Fed. Economic tightening tends to cause investors to pull away from high-risk assets like crypto, which is why yesterday's brief rally was surprising. What matters now is whether Bitcoin and other prices can hold these lows or whether they fall further.
Should you buy?
Cryptocurrency prices are extremely volatile and this is still a relatively new and unregulated market. Some people bought cryptocurrency last year in the hopes of getting rich quick, but no investment works that way. Instead, try to think about how Bitcoin might perform in the long term and how it fits with the rest of your investments. Here are some pointers that may help you decide if buying Bitcoin is right for you.
1. Don't expect the types of rallies we saw last year
Last year, we saw extraordinary performances from cryptocurrencies across the board. But things are different now. There are fears of a recession, inflation is higher than it's been in 40 years, and the ongoing Russia-Ukraine conflict only adds to global uncertainty.
It's more than six months since Bitcoin hit an all-time high, and in recent months it has struggled to gain any momentum. This doesn't mean Bitcoin can't reach new highs in the long term. It's just that it isn't realistic to expect the same price action we saw last year in the near term. In fact, crypto prices could drop even further.
2. Cover your other financial bases first
Cryptocurrencies are high-risk investments. They may perform exceptionally well, but they may also lose all of their value. That's why it's important to only invest money you can afford to lose. Before you buy any crypto, make sure your emergency fund is well stocked and you're up to date on your retirement savings. Don't prioritize crypto over other financial goals such as paying down debt -- your long-term financial well-being is more important than crypto investing.
3. Make sure you understand what you're buying -- and the risks
As with any investment, research is crucial. It's easy to buy crypto from a top crypto app or exchange, but pressing that buy button is the final step on a longer journey. The best way to avoid crypto buyers remorse is to take time to understand what Bitcoin is, how blockchain technology works, and what might help or hinder its development.
Volatility is just one of the many risks associated with cryptocurrency investment. Another is regulation, which could stifle crypto adoption. Bitcoin believers think it could become the digital currency of the future, and they may be right. But it is your hard-earned money, so you need to be sure you're OK with losing anything you invest.
If you have extra cash and have already done your research, now may be a good time to buy Bitcoin. Just don't rush in solely because it seems cheap today. True, buying Bitcoin at $36,000 will seem like a bargain if it eventually goes to $100,000 or even $1 million as some analysts predict. But what if it sinks to $10,000 or less?
It's easy to get caught up in the hype. But as the Federal Reserve introduces more economic tightening measures and fears of a recession grow, harder times could be ahead of us. Make sure you're ready for them before you spend your spare cash on crypto.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Emma Newbery owns Bitcoin. The Motley Fool owns shares of and recommends Bitcoin.
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