Cryptocurrency prices keep falling, but why? This year’s market crash has turned most winning portfolios into net losers, and new investors are probably losing hope in Bitcoin (BTC).
Investors know that cryptocurrencies exhibit above-average volatility, but this year’s decline has been extreme. After hitting a stratospheric all-time high of $69,400, the price of Bitcoin crashed over the next 11 months to hit an unexpected yearly low of $17,600.
This represents a loss of value of almost 75%.
Ether (ETH), the largest altcoin by market cap, also saw an 82% correction as its price fell from $4,800 to $900 in seven months.
Years of historical data show that drops in the 55%-85% range are the norm after bull market parabolic rallies, but the factors weighing on cryptocurrency prices today differ from those that triggered selloffs in the past. past.
For now, investor sentiment remains soft as investors avoid risk and wait to see if the Federal Reserve’s current monetary policy will alleviate persistently high inflation in the United States. On September 21, Fed Chairman Jerome Powell announced a 0.75% interest rate hike and hinted that similarly sized hikes would follow until inflation fell closer to the central bank’s 2% target.
Let’s dive into three reasons why cryptocurrency prices keep falling in 2022.
Federal Reserve Interest Rate Hikes
Rising interest rates increase the cost of borrowing for consumers and businesses. This has the effect of increasing the operating costs of businesses, the costs of goods and services, the costs of production, wages, and ultimately the cost of just about everything.
High and insurmountable inflation is the main reason the US Federal Reserve is raising interest rates. And ever since the rate hikes began in March 2022, Bitcoin and the cryptocurrency market in general have been in a correction.
When monetary policy or metrics that measure the strength of the economy change, risk assets tend to signal, or move, before equities. In 2021, the Fed began signaling its plans to eventually raise interest rates, and data shows that the price of Bitcoin corrected sharply in December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled what was coming for the equity markets.
The Persistent Threat of Regulation
The cryptocurrency industry and regulators have a long history of not getting along due to various misconceptions or mistrust about the actual use of digital assets. Without a framework for regulating the cryptocurrency sector, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and what exactly constitutes a legal payment system.
The lack of clarity on this matter weighs on growth and innovation within the sector, with many analysts believing that cryptocurrency mainstreaming cannot happen until a more universally agreed and understood set of laws is enacted.
Risk assets are heavily affected by investor sentiment, and this trend extends to Bitcoin and altcoins.. To date, the threat of unfriendly crypto regulations or, at worst, an outright ban, continues to affect crypto prices on an almost monthly basis.
Scams and Ponzis Triggered Liquidations and Repeated Blows to Investor Confidence
Scams, Ponzi schemes, and strong market volatility have also played a significant role in the decline in cryptocurrency prices throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to lack of regulation, the youth of the cryptocurrency industry, and the fact that the market is relatively small compared to equity markets. .
The implosion of LUNA from Terra and Celsius Network, as well as the misuse of leverage and customer funds by Three Arrows Capital (3AC) were responsible for successive blows to asset prices within the cryptocurrency market. . Bitcoin is currently the largest asset by market cap in the sector, and historically, altcoin prices tend to follow either direction of the BTC price.
As the Terra and LUNA ecosystem collapsed in on itself, the price of Bitcoin corrected sharply due to the multiple sell-offs that occurred within Terra, and investor sentiment sank.
The same thing happened to an even greater magnitude when Voyager, 3AC, and Celsius all crashed, wiping out tens of billions in investor funds and protocols.
What to expect for the rest of 2022 through 2023
The factors that impact the price decline within the cryptocurrency market are driven by Federal Reserve policy, which means that the Fed’s power to raise, pause, or lower rates will continue to have a direct impact on the price. Bitcoin price, ETH price and altcoin prices.
In the meantime, investor risk appetite is likely to remain subdued, and potential crypto traders might consider waiting for signs that US inflation has peaked as the Federal Reserve start using language that is indicative of a policy pivot.
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