Is Now the Time to "Buy the Dip"?
Since hitting a short-term peak at the end of March, Bitcoin (BTC) prices have been retreating. The currency has shed almost one-third of its value during this time and is hovering around the $30K level. Coincidentally (or perhaps not, if this is a technical level crypto fans are watching carefully), the $30K level marked a Bitcoin bottom last July.
But as crypto watchers, casual and obsessive all know, this is hardly the first pullback in the relatively short life of the cryptocurrency. In fact, it’s not the first pullback this calendar year. As we noted then, hitting the panic switch is rarely advisable, as operating from a place of fear (or, conversely, one of greed) is an emotional versus a rational decision. Knowing why the market is trading off may give investors the confidence to buy into the volatility, or what’s otherwise known as “buying the dip.”
More rational choices can be made by considering the causes for the latest pullback and keeping an eye on them. It’s also easier to make reasoned choices with less skin in the game. As exciting as crypto is, it’s also volatile, so invest judiciously and diversify when possible.
So let’s dig in. What do analysts and crypto-watchers think is causing this latest pullback?
Continued Inflation Pressure
Even though Bitcoin and other cryptocurrencies are considered a hedge against inflation (like precious metals), rising prices can have an adverse effect on the crypto market. When consumer goods are more expensive, people have less discretionary income to invest in crypto, and less demand leads to lower prices. The annual rate of inflation hit a 40-year high in March, with energy prices alone surging 32%. As the war in Ukraine continues and supply chain challenges weigh on all sectors, the Consumer Price Index (CPI) may remain a number to keep track of.
The Big Fed Move
In an effort to tamp down this rising inflation, the Federal Reserve increased its key fed funds rate by 0.50%, or 50 basis points. While half a percentage point may not seem significant, it’s the biggest increase since 2000. Fed watchers think the central bank may just be getting started, with future hikes possible at the bank’s scheduled June and July meetings.
Higher rates mean borrowing money is more expensive, whether you’re in the market for a home, a car, or a competitive loan. The objective of a rate hike is to slow down spending — without going so far as to spark a recession. This environment may reduce trading among higher-risk assets, at least in the short term.
The continuing crisis in Ukraine has the world on edge. The conflict has affected already inflated oil and gas prices, but otherwise, investors seem to be focused on economic measures closer to home. While wars themselves don’t typically have a measurable impact on financial markets, uncertainty breeds caution. And cautious traders may be less likely to act on a historically volatile opportunity, like crypto.
Bitcoin and its peers are increasingly moving in closer concert with the S&P 500 Index, the bellwether grouping that tracks the performance of the largest U.S. companies. In fact, just this week, Bitcoin’s correlation with the SPX has hit a new record.
This past correlation may not be prologue, as cryptocurrencies are intended to act as a hedge against fluctuations in the equity and other financial markets. But for now, as the market struggles to digest the rate hike and other news, the crypto market is following suit. This is especially true with regard to tech stocks, which are traditionally more volatile and have, of late, been in bear-market mode.
If there was a holy grail to predicting price fluctuations, the financial world would be a very different place. Sometimes, pullbacks are driven largely by human emotion, which is hard to measure and even harder to forecast. But knowing the fundamental reasons behind the spikes and drops in crypto should allow you to feel more informed and ultimately more confident when buying, selling, or diversifying your crypto holdings.
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