Cryptocurrency prices keep falling, but why? This year’s market crash has turned most winning portfolios into net losers, and new investors are likely losing hope in Bitcoin (BTC).
Investors know that cryptocurrencies show higher-than-average volatility, but this year’s draw has been extreme. After reaching an all-time stratospheric high of $69,400, the price of Bitcoin plunged to an unexpected annual low of $17,600 over the next 11 months.
That’s almost a 75% reduction in value.
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 drawdowns in the 55-85% range are the norm after parabolic bull market rallies, but the factors driving cryptocurrency prices today are different from those that triggered selloffs in the past.
At the moment, investor sentiment remains soft as investors remain risk-averse and wait to see if the current Federal Reserve monetary policy will moderate persistently high inflation in the United States. On September 21, Fed Chairman Jerome Powell announced a 0.75% interest rate hike and indicated that similar hikes will occur until inflation falls closer to the central bank’s 2% target.
Let’s take a deeper look at three reasons why cryptocurrency prices keep falling in 2022.
The Federal Reserve raises interest rates
Rising interest rates raise the cost of borrowing money for consumers and businesses. This results in an increase in the operating costs of the business, the cost of goods and services, the cost of production, wages and ultimately the cost of almost everything.
High, rampant inflation is the main reason why the United States Federal Reserve raises interest rates. And since rate hikes began in March 2022, Bitcoin and the broader crypto market have been on a correction.
When monetary policy or metrics that measure the strength of the economy change, risk assets tend to signal or move earlier than stocks. In 2021, the Fed began to signal its plans for a possible interest rate hike, and data shows that the price of Bitcoin will correct sharply by December 2021. In a way, Bitcoin and Ethereum were canaries in the coal mine, signaling what was to come in 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 “canaries in the coal mine” as they reflect 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, whether due to various misconceptions or mistrust of the real use case of digital assets. Without a functioning framework to regulate the crypto sector, different countries and states have a number of conflicting policies regarding how cryptocurrencies are classified as assets and what exactly constitutes a legal payment system.
The lack of clarity growth and innovation in the sector is weighing on the matter, and many analysts believe that mainstreaming of cryptocurrencies cannot occur until a more universally agreed upon and understood set of laws is enacted.
Risk assets are heavily influenced by investor sentiment, and this trend extends to Bitcoin and altcoins as well. To date, the threat of hostile cryptocurrency regulations or, at worst, a complete ban continues to affect cryptocurrency prices on an almost monthly basis.
Frauds and Ponzis triggered liquidations and repeated blows to investor confidence
Fraud, Ponzi schemes, and extreme market volatility have also played a significant role in the price collapse of cryptocurrencies throughout 2022. Bad news and events that threaten market liquidity tend to cause catastrophic results due to the lack of regulation, the youth of the cryptocurrency industry and market is relatively small in comparison with stock markets.
Implosion of Terra’s LUNA and Celsius Network as well as abuse of leverage and client funds by Three Arrows Capital (3AC) were responsible for subsequent blows to crypto market asset prices. Bitcoin is currently the largest asset by market capitalization in the sector, and historically, altcoin prices tend to follow which way the price of BTC goes.
As the Terra and LUNA ecosystem collapsed in on itself, the price of Bitcoin corrected sharply due to the multiple liquidations that occurred within Terra – and investor sentiment worsened.
The same thing happened on an even larger scale when Voyager, 3AC, and Celsius all collapsed, wiping out tens of billions of investor and protocol funds.
What to expect for the rest of 2022 to 2023
The factors driving the falling prices in the crypto market are driven by the policy of the Federal Reserve System, which means that the power of the Fed to raise, pause or cut rates will continue to have a direct impact on the price of Bitcoin, the price of ETH and the prices of altcoins.
Meanwhile, investors’ risk appetite is likely to remain muted, and potential cryptocurrency traders might consider waiting for signs that US inflation has peaked and for the Federal Reserve to begin using key policy language.
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