Bitcoin Slips Below $29,000. What It Means for Investors

Inflation remains close to 40-year highs, which is not good for crypto prices.

Bitcoin (BTC) dropped below $29,000 today. According to CoinMarketCap data, it fell as low as $28,170 this afternoon -- lower than it was at any point in 2021. While market leader Bitcoin fell by around 8% in 24 hours, some top altcoins were down even further. Last year's crypto darling, Solana (SOL) was down over 30% at time of writing, taking it to a drop of almost 75% since the start of the year.

Why is Bitcoin dropping?

The biggest factor weighing on crypto prices is the impact of economic tightening measures designed to reduce inflation. Last week, the Federal Reserve raised interest rates by 0.50%, the biggest hike in over 20 years. This sent jitters through the crypto and stock market as investors pulled out of riskier asset classes.

But there are some additional factors playing on crypto prices today. Here are a few of them:

1. Inflation has not fallen

The latest consumer price index (CPI) figures were announced today. They showed a slight drop in inflation, but the figure remains close to 40-year highs. The inflation rate for April stood at 8.3%, down slightly from 8.5% in March. However, economists had hoped for a bigger drop. Crypto prices fell on fears that the Federal Reserve may react to the still-high inflation figures by introducing even harsher measures.

Inflation is part of a wider economic and geopolitical backdrop that has pushed investors toward safer ground. There's a fear that drastic measures to curb inflation could trigger a recession, which would push equity and crypto prices down even further.

2. Terra's LUNA collapse

Terra's LUNA is down 98% in the past week after its stablecoin TerraUSD (UST) repeatedly lost its peg in the recent market turbulence. The collapse of a relatively well-established crypto, particularly one that's been soaring in recent months, has severely shaken investor confidence. It's also raised a number of questions about the stability of stablecoins and the lack of consumer protections.

Authorities have been pushing for increased stablecoin regulation for some time. Terra's rapid disintegration could accelerate that process and give lawmakers more reason to crack down on stablecoins.

What it means for investors

It's one thing to know that cryptocurrency is a high-risk investment, it's quite another to see the value of your portfolio dwindle by 50% or more. Cryptocurrencies are volatile and these ups and downs are part of the rollercoaster ride of crypto investing. But that doesn't make these dramatic drops any easier to stomach.

It doesn't help that cryptocurrencies don't have the same track records as other assets. For example, stock investors can seek reassurance in a long price history that shows equities have always eventually recovered from these lows. We only have 13 years of price history for Bitcoin -- even though in that time the lead crypto has always swung back and gone on to new highs.

In the short term, investors need to brace themselves for further potential losses. Bitcoin may rally, but it may also fall further and it's best to prepare for more bad news. Some investors see these dips as an opportunity to buy crypto at a discounted price, but that depends a lot on your personal situation. If you only invest money you can afford to lose and you're comfortable with the potential for further downward price action, it might make sense.

Some investors may be considering cutting their losses and selling. This is understandable. However, panic selling at a low will only lock in your losses. If you sell now, you won't be in a position to benefit from any eventual recovery. If you still believe Bitcoin has potential, now's the time to hold on to that conviction and keep your eyes on the long-term horizon.

Bottom line

It isn't easy to watch your investments lose value, especially when many analysts predict further woes for the market. Many of the extraordinary gains of last year have now been erased, and there are no guarantees about what will happen now. However, panic selling rarely produces good results. Take a step back and think about why you originally bought Bitcoin. If your thinking still holds true, it may help you hold on, even if this is the start of a crypto winter.