Bitcoin Is Back Over $40,000. Here’s How Investors Should React to the Volatility – NextAdvisor

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John Puterbaugh is a journalist with more than 10 years of experience leading editorial teams in personal…
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Ryan Haar is a former personal finance reporter for NextAdvisor. She previously wrote for Bloomberg News, The…
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Bitcoin’s price dropped back below $43,000 Friday morning, after topping $45,000 Thursday.
Despite the drop Friday, Bitcoin has been above $40,000 all week, extending a rally that started late last week.
Before last Friday, Bitcoin hadn’t been above $40,000 since Jan. 20. Its drop below $34,000 on Jan. 24 marked the lowest Bitcoin’s price has been since July 2021.

While it appears to be on the rise now, Bitcoin’s stalling price in recent weeks followed an announcement by Federal Reserve Chairman Jerome Powell that the Fed will begin raising rates at its next meeting in March to counteract continued rising inflation. More broadly, January’s big drop for Bitcoin — Ethereum saw a similar big drop — came amid the stock market’s worst month since March 2020, and after the release of the Federal Reserve’s long-awaited report on a possible government-issued digital currency.

The big selloff was at least partly due to investors taking a fresh look at their portfolios, says Grant Maddox, a South Carolina-based certified financial planner. “Many investors are removing risk from their portfolios at the moment. It could be the sign of a new market cycle,” Maddox told us recently.
Bitcoin’s price has been between $42,000 and $46,000 this week. Here’s how Bitcoin’s current price compares to its daily high point over the past few months:
The slumping prices continue to be influenced by surging inflation, a disappointing December jobs report and continued signs from the Fed that the central bank will begin winding down pandemic measures to support the economy this year.
After nearly hitting $52,000 on Dec. 27, Bitcoin has ranged between $33,000 and $50,000 in the days since.
Despite the recent slump, Bitcoin started 2022 on a relative high note, with a strong November and early December that gave way to the recent downward trend. After starting 2021 in the $30,000 range, Bitcoin increased throughout the year and hit its current all-time high when it went over $68,000 on Nov. 10.

The volatility and stalling price continues apace with new economic uncertainty over the Omicron COVID-19 variant, new statements from Federal Reserve Chairman Jerome Powell on the health of the economy, and ongoing comments from U.S. officials like SEC Chairman Gary Gensler on cryptocurrency regulation.
Despite falling back significantly from its latest all-time high price, many experts still expect Bitcoin’s price to rise above $100,000 at some point — describing it as a matter of when, not if. Shortly after Bitcoin’s latest all-time high, Ethereum marked its own new all-time high when its price went over $4,850. Ethereum, too, has seen similar volatility following the latest high.

Bitcoin first hit a high of more than $60,000 in April, and the price movement since then highlight the cryptocurrency’s volatility in a time when more and more people are interested in getting in on the action. In the weeks between a July low point that took it below $30,000 and its most recent high point in November, Bitcoin has been up and down. The future of cryptocurrency is sure to include plenty more volatility, so this is all par for the course.
We’ve talked to investing experts and financial advisors who advise against sinking much of your portfolio into the asset class for this very reason. They work with clients to make sure volatile crypto investments aren’t getting in the way of other financial priorities, like saving an emergency fund and paying off high-interest debt. 
“You have a high chance of losing it all, but a small chance of winning it big,” says Nate Nieri, a CFP with Modern Money Management in San Diego, California. “Don’t gamble an amount that would burden your family or prevent you from achieving your goals” if you lost it all, he says.
How does this latest crash compare to previous ones, or even to regular stock market drops — and what does it mean for investors? 

What Does This Price Drop Mean for Crypto Investors?

For those who invest in crypto for the long-term using a buy-and-hold strategy, swings like this are to be expected. Big dips are nothing to be overly worried about, according to Humphrey Yang, the personal finance expert behind Humphrey Talks, who says he avoids checking his own investments during volatile market dips.
“I’ve been through the 2017 cycle, too,” Yang says, referencing the “crypto crash” of 2017 that saw many major cryptocurrencies, including Bitcoin, lose major value. “I know that these things are super volatile, like some days they can go down 80%.”
Experts recommend keeping your cryptocurrency investments to under 5% of your portfolio. If you’ve done that, then don’t stress about the swings, because they’re going to keep happening, according to Bill Noble, chief technical analyst at Token Metrics, a cryptocurrency analytics platform.
“Volatility is as old as the hills, and it’s not going anywhere,” Noble says. “It’s something you have to deal with.”
As long as your crypto investments don’t stand in the way of your other financial goals and you’ve only put in what you’re ultimately OK with losing, Yang recommends using the same strategy that works for all long-term investments: set it and forget it. 

If this type of extreme drop bothers you, you may have too much riding on your crypto investments. You should only invest what you’re OK losing. But even if the drop is making you rethink your crypto allocations, the same advice still stands — don’t act rashly or upend your strategy too quickly. Reconsider what you might be more comfortable with going forward, such as allocating less to crypto in the future or diversifying through crypto-related stocks and blockchain funds rather than directly buying crypto (though you should still expect volatility when cryptocurrency markets fluctuate).
“Don’t check on it. That’s the best thing you can do. If you let your emotions get too much into it then you might sell at the wrong time, make the wrong decision,” says Yang.
Yang’s set it and forget it approach to crypto reflects his philosophy for investing in the traditional stock market, but some experts feel cryptocurrency is too different from traditional investments to draw any historical comparisons. That’s why A’Shira Nelson of Savvy Girl Money is staying well away.
Nelson primarily invests in low-cost index funds because “I can see history on that,” she says. The newness of cryptocurrency and lack of trackable data make her wary of these crazy swings. 
Potential investors looking to buy the dip should understand that fluctuations are par for the course, and be prepared for this kind of volatility going forward.  Even if you invest now, with prices relatively low, be prepared for them to fall even more. Again, only put in what you’re comfortable with losing — after you’ve covered other financial priorities, like emergency savings and more traditional retirement funds.

What’s Behind the Latest Bitcoin Drop? 

Many investors see Bitcoin’s price swings as part of the game, but “volatility is tough for individual investors to deal with,” Noble says. Like Yang, he warns against selling too fast.
Recent price fluctuation has followed new uncertainty over the country’s lingering fight with COVID-19, new regulatory actions by the U.S. government, as well as the new legislation pertaining to crypto in the infrastructure bill. In an industry as new and unproven as cryptocurrency, it doesn’t take much to drive big swings in price. More generally, new short-term investors who are selling their holdings in reaction to the latest drop may be contributing to the drop in Bitcoin’s value, according to a report from Glassnode Insights, a blockchain analysis firm.
While fluctuations are expected, Noble says he’s been surprised if by drops earlier this year. “I thought the market was maturing and these things would be less frequent and severe. Boy was I wrong,” he says. 
Some of this year’s drops have been caused by a combination of factors, Noble theorizes, from excitement about low-quality coins, to negative remarks from Elon Musk, to China’s recent crackdown on crypto services. This mix of factors has potential to make sell-offs “all the more violent,” says Noble. 
He likens the drop to the stock market crash of 1987, from which the markets took months to recover. But because crypto moves a lot faster today than equities did in the 1980s, Noble says we may see a quicker recovery. 
“Don’t panic and puke,” Noble says. “If you keep your positions small, you can try to tolerate the volatility.”
NextAdvisor reporter Alex Gailey contributed.
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