Cryptocurrency prices keep falling, but why? This year’s market crash has turned most portfolio winners into net losers, and new investors are likely losing hope in Bitcoin (BTC).
Investors know that cryptocurrencies have above-average volatility, but this year’s drop was extreme. After hitting a stratospheric all-time high at $69,400, Bitcoin price plummeted over the next 11 months to an unexpected yearly low at $17,600.
That’s a nearly 75% reduction in value.
Ether (ETH), the largest altcoin by market cap, also saw an 82% correction as its price dropped from $4,800 to $900 in seven months.
Years of historical data show that drawdowns in the 55% to 85% range are the norm after the parabolic rallies of the bull market, but the factors weighing on cryptocurrency prices today differ from those that triggered sales in the past.
At the moment, investor sentiment remains mild 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 Chair Jerome Powell announced a 0.75% interest rate hike and hinted that similar-sized increases would occur until inflation approached the central bank’s 2% target.
Let’s take a deeper look at three reasons why cryptocurrency prices keep dropping in 2022.
Federal Reserve interest rate hike
Rising interest rates increase the cost of borrowing money for consumers and businesses. This has the knock-on effect of increasing the company’s operating costs, the costs of goods and services, production costs, wages, and eventually the cost of almost everything.
High and uncontrollable inflation is the main reason why the US Federal Reserve is raising interest rates. And since the rate hikes began in March 2022, Bitcoin and the broader cryptocurrency market have been on a correction.
When monetary policy or metrics that measure the strength of the economy change, risky assets tend to signal or move ahead of equities. In 2021, the Fed began signaling its plans to raise interest rates eventually, and the data shows Bitcoin price correcting sharply in December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled the what was to come for the stock markets.
If inflation starts to ease, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risky assets like Bitcoin and altcoins could once again be the “canaries in the coal mine” reflecting the return to assets of risk in investor sentiment.
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 case for digital assets. Without a framework for regulating the cryptocurrency industry, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.
The lack of clarity on this matter weighs on growth and innovation within the industry, and many analysts believe that cryptocurrency integration cannot happen until a more universally agreed and understood set of laws is enacted.
Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of hostile cryptocurrency regulations or, at worst, an outright ban continues to affect cryptocurrency prices on an almost monthly basis.
Scams and Ponzis Triggered Liquidations and Repeated Blows to Investor Confidence
Scams, Ponzi schemes and strong market volatility also played a significant role in the drop in cryptocurrency prices throughout 2022. Bad news and events that jeopardize market liquidity tend to cause catastrophic results due to the lack of regulation, the youth of the sector. of cryptocurrencies and the market being relatively small compared to stock markets.
The implosion of Terra’s LUNA Network and Celsius, as well as the misuse of leverage and client funds by Three Arrows Capital (3AC), were responsible for successive hits to asset prices in the cryptocurrency market. Bitcoin is currently the largest asset by market capitalization in the industry and historically, altcoin prices tend to follow whichever direction the BTC price goes.
As the Terra and LUNA ecosystem collapsed, the price of Bitcoin corrected dramatically due to multiple liquidations taking place within Terra – and investor sentiment plummeted.
The same happened with even greater magnitude when Voyager, 3AC and Celsius all collapsed, wiping out tens of billions in investor funds and protocols.
What to Expect for the Rest of 2022 to 2023
The factors affecting the price drop in 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 of Bitcoin, price of ETH and price of altcoins.
In the meantime, investors’ appetite for risk will likely remain muted, and potential crypto traders may consider waiting for signs that US inflation has peaked and the Federal Reserve begins using language that is indicative of a policy pivot. .
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