Has Bitcoin Finally Reached a Bottom?

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KEY POINTS

  • Bitcoin fell to under $18,000 over the weekend before climbing back above $20,000.
  • Until the economic situation improves and the Fed eases its tightening measures, crypto will probably continue to struggle.
  • Unfolding issues in decentralized finance also have an impact on Bitcoin's price.

Sadly, it's too early to talk about an end to crypto pain.

Bitcoin (BTC) is up over 6% today after slipping below the all-important $20,000 level over the weekend. It fell as low as $17,709 before climbing back to around $21,190 at time of writing, according to CoinMarketCap data. However, that slight rise will be little comfort to investors who've seen their portfolios decimated in recent months.

Some analysts say that if Bitcoin can hold its head above $20,000, it may mean the lead crypto's price has finally bottomed out. It's understandable that people are eager to see an end to this period of painful prices, but it's too early to talk about recovery. Bitcoin is down almost 70% from its all-time high and there are a number of clouds still on the crypto horizon.

Why Bitcoin is struggling

The main reason Bitcoin is struggling is that the economic climate today is very different from the one that pushed the whole crypto industry to new highs last year. Economic tightening measures mean there's a lot less money sloshing around -- and that has a huge impact on high-risk assets like crypto.

With inflation at 40-year highs, the U.S. faces a cost of living crisis. The Federal Reserve wants to bring inflation down and is using all the tools it has at its disposal. Most recently, it introduced a jumbo rate hike of 0.75%, which played a big role in Bitcoin's latest downward price action. There may be another similar increase next month as well. These drastic measures have sparked fears of a recession, adding to Bitcoin's woes.

Another significant factor is an unfolding crisis in decentralized finance (DeFi). DeFi cuts the middleman out of traditional banking and offers bank-free loans, interest-paying accounts, and other services. The trouble -- as we're now discovering -- is that it also cuts out various forms of investor protection and financial safeguards. For example, some platforms are so interconnected that the failure of one can trigger a domino effect.

In May, Terra's LUNA ecosystem collapsed, wiping out around $60 billion in a short period of time. We're still feeling the after effects. Most recently DeFi lenders Celsius and Babel Finance have frozen withdrawals on their platforms, blaming extreme market conditions. There are also insolvency rumors around crypto hedge fund Three Arrows Capital. The big question is: If any of these three fall, will other platforms then follow? The swirling uncertainty around DeFi does not help Bitcoin's price in the near term.

Is this the bottom?

After weeks of downward price action, the small increases we've seen in recent days are certainly a relief. But it's much too early to talk about a bottom or any kind of recovery. For starters, the economic conditions that caused the drop have not yet passed. Prices can't recover while the Fed is still hiking rates and the specter of recession hangs over investors. In addition, the rumbling DeFi crisis is not over and we don't know what shape increased crypto regulation will take.

If the reason you're wondering whether Bitcoin is bottoming out is that you want to buy the dip, there are a few things to consider. Firstly, take your time. We're extremely unlikely to see a dramatic rally anytime soon, so you can afford to research the top crypto's long-term potential and consider how it fits in your portfolio. Make sure you understand the risks involved and only invest money you can afford to lose.

READ MORE: Top Crypto Apps and Exchanges

Secondly, make sure you're on top of your emergency fund and other financial goals. It may feel like a good time to buy Bitcoin at a discount, but it's more important to first get on top of the things that will give you financial security and help you survive any upcoming economic turbulence. If you lose your job or face a medical emergency next month, it would be frustrating if the cash you needed to tide you over was tied up in a speculative asset like crypto.

Finally, be aware that prices may well fall further. One strategy that can reduce risk in these volatile markets is dollar-cost averaging. This involves buying a set amount of crypto at regular intervals rather than one lump sum. For example, if you had $1,000 to invest, you might buy $100 of Bitcoin at a fixed point each month or week. That way, you don't end up waiting for the price to hit a bottom and never actually investing anything. At the same time, if the price falls further, you won't have put all your cash in at the wrong time.

Bottom line

It's almost impossible to know whether Bitcoin has reached a bottom. But with so many uncertainties in the market, there's a good chance prices will fall further. As a crypto investor, it's important to take steps to minimize your risks and shore up your non-crypto financial bases. Right now, it's the wider economic situation that's having the biggest impact on crypto prices, so watch for signs of improvement there. This may be the first sign of potential recovery for Bitcoin.

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