What Caused Bitcoin to Drop Below $36,000 for the First Time Since July?

Bitcoin has experienced quite a large dip over the past week. The price even dropped under $36,000 for the first time since July 2021. This has led many that follow cryptocurrency to wonder what exactly happened. 

The drop was caused by a few different events coming together at one time for a massive price drop. These events include the following:

US Federal Reserve Raising Interest Rates

The first major reason that Bitcoin, and cryptocurrency in general, dropped was because the US Federal Reserve announced they would raise interest rates in 2022 to combat inflation. This announcement has a negative impact on the price of assets because more money printing generally means a higher asset price. 

Many expect the Fed to raise interest rates sometime this week. We find that a little too soon, but Goldman Sachs has predicted that the Fed will raise interest rates at least four times in 2022. 

That’s bad for cryptocurrency and it’s bad for the stock market. 

Potential NATO-Russia War

The NATO aligned countries and Russia have recently had increasing tensions over Ukraine. The exact reasoning behind the tensions are not particularly relevant to the price of Bitcoin. 

What is relevant is that many foreign policy experts predict a war could break out between NATO and Russia. 

The cryptocurrency market reacts very negatively to any form of global turmoil. A local low was reached when the coronavirus pandemic first emerged and lockdowns swept the country. 

The general rule of thumb is that risky assets greatly lose value in times of turmoil. People want to cash in the event that something catastrophic happens, so they have a tendency to sell their riskier assets.

Leveraged Traders Got Wiped Out

Finally, a significant portion of traders had leveraged long positions in Bitcoin. This always happens when the price of Bitcoin plateaus – people leverage long positions into it because they erroneously believe the price will never drop. 

Unfortunately for them, the price of Bitcoin can drop very quickly. If the price drops below the liquidation threshold, then the Bitcoin is liquidated and sold on the open market. This simply adds more sell pressure to an already falling asset. 

Will Bitcoin Ever Recover?

It’s a little shortsighted to think that Bitcoin will not recover from a price crash. Bitcoin has recovered from every previous price crash. 

This is especially true now that Bitcoin has begun receiving more attention and use from the general public. It’s legal tender in one country already – more will likely make Bitcoin legal tender in the future. Not to mention that many large businesses and wealthy individuals have recently started purchasing large amounts of Bitcoin. 

The price of Bitcoin will almost certainly reach a new all time high in the next five years after the next halving. 

It’s inevitable at this point.  

Is Bitcoin Under $36,000 a Good Investment?

Bitcoin has historically always been a good investment on a long enough timeline. A 50% drop in price today could be worth 100 times more in a decade. 

That’s basically the entire history of Bitcoin’s price – people think Bitcoin is over because the price drops too much too fast. And then a few years later everyone wishes they bought in during that dip because the price has increased 1000% or more. 

Those days of 1000% gains might be over, but we fully expect Bitcoin to experience continued price appreciation over the next decade. 

Anyway, the best strategy for investing in Bitcoin is generally to dollar cost average into it. For those that don’t know, dollar cost averaging is when you purchase a set dollar amount of an asset at regular intervals. 

You could buy $100 worth of Bitcoin every week for a year, which would add up to $5,200 over the year. Alternatively, you could purchase $5,200 at once, but that can be a little riskier. 

Investors like to dollar cost average into assets because short term price fluctuations are averaged out. It’s also much easier from a psychological perspective to dollar cost average. 

Closing Thoughts

Three reasons coming together at one time caused a massive price drop for Bitcoin. The US Federal Reserve announced they would raise interest rates in 2022 to fight off inflation, the conflict between Russia and Ukraine heating up, and too many leveraged traders getting wiped out was a perfect storm for a substantial price drop. 

The good news is that the price of Bitcoin will eventually recover. It might take a few years for the recovery, but it will happen at some point. This price drop really is not something to worry about in the long term even though it’s not fun in the short term.