Should Investors Be Worried by Bitcoin's Fall Below $20,000?

Bitcoin fell to new lows over the weekend after one of the industry's worst weeks ever.

Last week was one of the worst weeks ever for cryptocurrency investors. Over the weekend, the price of lead crypto Bitcoin (BTC) fell below $20,000 and Ethereum (ETH) dropped below $1,000 -- both significant levels for the two top coins.

Cryptocurrency is not the only asset class that's suffering right now. Both the S&P 500 and Nasdaq are in bear market territory and many economists warn a recession is likely. According to Bloomberg, even a risk-averse investor with 60% in stocks and 40% in bonds would be down about 17% so far this year.

Bitcoin's fall below $20,000

The Federal Reserve's aggressive moves to curb inflation are the biggest driver behind recent price drops, compounded by increasing fuel prices and market uncertainty. As a result, we're unlikely to see much respite until inflation is back under control and the Fed eases its restrictive measures.

The other big issue for cryptocurrency prices is the issues faced by the decentralized finance industry. There is a lot of interconnectedness in DeFi, fueling fears that we haven't yet seen the full impact of the collapse of Terra's LUNA ecosystem. All eyes are now on Celsius. The decentralized lending platform, which suspended withdrawals just over a week ago, now says it needs more time to stabilize its position. Crypto hedge fund Three Arrows Capital also suffered heavy losses following LUNA's crash and is reportedly looking at its options.

According to CoinMarketCap data, Bitcoin slipped below $18,000 over the weekend. The top crypto struggled to gain any momentum until yesterday, when it pulled back above the $20,000 mark. Bitcoin has now erased some of its weekend losses, and analysts are watching to see if it can sustain its position.

Should investors be worried?

Some analysts have been quick to call the bottom and say that prices will now rise after this weekend's dip. But that's extremely optimistic. Others are more cautious, pointing out that until inflation falls, we can't assume the worst is behind us. Put simply, in the short term, investor worries are entirely understandable. Not only have we seen the value of our portfolios decimated, but prices could still fall further.

More economic tightening is not the only cloud on the crypto horizon. For example, increased crypto regulation is still in the cards, and we don't know how strict it will be or what impact it will have on prices. In addition, as we touched on above, the situation with Celsius and Three Arrows has yet to fully play out.

However, there are also reasons for optimism in the long term and things might eventually come right. Bitcoin has come a long way in its short lifetime. It has been adopted as legal tender in two different countries, institutional adoption has never been higher, and its price is up almost 700% in the past five years, in spite of its recent woes. Even so, it still has a long way to go and a lot of hurdles to jump. Crypto remains a high-risk investment and there are no guarantees.

Ultimately though, worrying rarely achieves anything. It certainly isn't going to change the current economic climate. Instead, try to focus on how you can manage this scenario and ensure a crypto crash does not stop you achieving your financial goals. For example:

• Make sure crypto only represents a small percentage of your overall portfolio. It's true that most assets are down right now, but high-risk assets like crypto are down a lot more. Moreover, we can look at almost 100 years of data from, say, the S&P 500, making it easier to believe in an eventual equity recovery. In contrast, many top cryptos are not even 10 years old.
• Only invest money you can afford to lose. This is the golden rule of crypto investing as it means your financial plans won't be derailed even if the worst happens and the industry fails completely.
• Prioritize your emergency fund and paying down debt. There is a lot of uncertainty right now and it isn't clear how long the economy will take to recover. Rather than putting money into risky investments like crypto, this is a good time to shore up your financial bases.

Bottom line

The trick with crypto investing is to plan for the worst and hope for the best. Everybody's financial situation is different and only you know your financial goals and reasons for investing. But if you believe Bitcoin might perform well in the long term and have only invested money you can afford to lose, at least you know you can wait out this slump.