Crypto Prices Keep Falling, But Why? This year’s stock market crash turned most winning portfolios into net losers, and new investors are likely losing hope in Bitcoin (BTC).
Investors know that cryptocurrencies have above-average volatility, but the decline this year has been extreme. After hitting a stratospheric all-time high at $69,400, the price of Bitcoin crashed over the next 11 months to hit an unexpected yearly low at $17,600.
That’s a nearly 75% drop in value.
Ether (ETH), the largest altcoin by market capitalization, also saw an 82% correction as its price fell from $4,800 to $900 in seven months.
Years of historical data show declines in the 55%-85% range are the norm after parabolic bull market rallies, but the factors weighing on crypto prices today differ from those that triggered sales in the past.
At present, investor sentiment remains weak as investors are risk averting and waiting to see if the Federal Reserve’s current monetary policy will dampen persistently high inflation in the United States. On September 21, Fed Chairman Jerome Powell announced an interest rate hike of 0.75% and hinted that hikes of a similar size would occur until inflation moved closer to the central bank’s 2% target.
Let’s take a closer look at three reasons why crypto prices continue to fall in 2022.
Federal Reserve interest rate hike
Rising interest rates increase the cost of borrowing money for consumers and businesses. This has the effect of increasing business operating costs, costs of goods and services, production costs, wages, and ultimately the cost of almost everything.
High and out of control inflation is the main reason the US Federal Reserve is raising interest rates. And since the rate hikes began in March 2022, Bitcoin and the broader crypto market have undergone a correction.
When monetary policy or measures that measure the strength of the economy change, risky assets tend to signal or move sooner than stocks. In 2021, the Fed started signaling its intention to eventually raise interest rates, and data shows that the price of Bitcoin corrects sharply by December 2021. In a way, Bitcoin and Ethereum were the coal mine canaries that signaled what awaited the stock markets.
If inflation begins to decline, 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 of risk -on 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 distrust of the real use case for digital assets. Without a framework for regulating the crypto sector, 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 issue is weighing on growth and innovation within the industry, and many analysts believe that the integration of cryptocurrencies cannot occur until a more universally agreed and understood set of laws is enacted. .
Risky assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To this day, the threat of hostile cryptocurrency regulations or, in the worst case scenario, an outright ban continues to impact crypto prices on an almost monthly basis.
Scams and Ponzis have sparked liquidations and repeated blows to investor confidence
Scams, Ponzi schemes and high market volatility have also played a significant role in the fall in crypto prices throughout 2022. Bad news and events that compromise market liquidity tend to lead to catastrophic results due to lack of regulation, youth of the cryptocurrency industry and market. being relatively weak compared to equity markets.
The implosion of Terra LUNA and Celsius Network as well as the misuse of leverage and client funds by Three Arrows Capital (3AC) have each been responsible for successive blows to asset prices in the crypto market. Bitcoin is currently the largest asset by market capitalization in the industry, and historically, altcoin prices have tended to follow the direction of BTC price.
As the Terra and LUNA ecosystem crumbled in on itself, the price of Bitcoin corrected sharply due to multiple selloffs occurring within Terra – and investor sentiment plummeted.
The same thing happened on an even greater scale when Voyager, 3AC and Celsius collapsed, wiping out tens of billions of investor funds and protocols.
What to expect for the rest of 2022 to 2023
Factors impacting price declines in the crypto market are driven by Federal Reserve policy, which means the Fed’s power to raise, suspend, or cut rates will continue to have a direct impact on the price of Bitcoin, the price of ETH and the price of altcoin.
In the meantime, investors’ risk appetite should remain subdued, and would-be crypto traders might consider waiting for signs that US inflation has peaked and the Federal Reserve is starting to use language. indicating a political pivot.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.