Why is the cryptocurrency market down today?

Cryptocurrency prices continue to fall, but why? This year’s market crash has turned most of the winning portfolios into net losers, and new investors are likely losing hope in Bitcoin (BTC).

Investors know that cryptocurrencies exhibit above-average volatility, but this year’s drawdown has been extreme. After hitting an all-time high at $ 69,400, Bitcoin’s price plummeted over the next 11 months to an unexpected annual low of $ 17,600.

This is a drop of almost 75%.

Ether (ETH), the largest altcoin by market cap, also saw an 82% correction as its price plummeted 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 weighing on cryptocurrency prices today differ from those that triggered sales in the past.

At present, investor sentiment remains weak as investors shy away from risk and wait to see if the Federal Reserve’s current monetary policy will alleviate persistently high inflation in the US. In September 21, Fed Chairman Jerome Powell announced a 0.75% hike in interest rates and hinted that hikes of a similar size would occur until inflation got closer to the target. 2% of the central bank.

Let’s take a deeper look at three reasons why cryptocurrency 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 ripple effect of increasing business operating costs, costs of goods and services, production costs, wages, and ultimately the cost of almost everything.

High and unbearable inflation is the main reason the US Federal Reserve is raising interest rates. And since rate hikes began in March 2022, Bitcoin and the broader cryptocurrency market have undergone a correction.

When monetary policy or the metrics that measure the strength of the economy change, risk assets tend to signal, or move, before stocks. In 2021, the Fed began signaling its plans to raise interest rates eventually and data shows that the price of Bitcoin has strongly corrected by December 2021. In a sense, Bitcoin and Ethereum have been the canaries in the mine. of coal that signaled what awaited us for 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 altcoin could again be the “canaries in the coal mine” reflecting the return of the 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 misunderstandings or distrust of the actual use case of digital assets. Without a framework for regulating the cryptocurrency industry, different countries and states have a myriad of conflicting policies on how cryptocurrencies are classified as assets and exactly what constitutes a legal payment system.

The lack of clarity on this topic weighs on growth and innovation within the industry, and many analysts believe that mainstreaming of cryptocurrencies cannot happen until a universally agreed and understood set of laws are 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 impact cryptocurrency prices on a near-monthly basis.

Scams and Ponzis have triggered liquidations and repeated blows to investor confidence

Scams, Ponzi schemes, and high market volatility have also played a significant role in the collapse of cryptocurrency prices throughout 2022. Bad news and events affecting market liquidity tend to cause catastrophic outcomes due to lack of regulation. of the youth of the cryptocurrency industry and the market being relatively small compared to stock markets.

The implosion of Earth’s LUNA and Celsius network, as well as the misuse of leverage and client funds by Three Arrows Capital (3AC), have each been responsible for subsequent blows to asset prices within the market. of cryptocurrencies. Bitcoin is currently the largest asset by market capitalization in the industry and, historically, altcoin prices tend to follow the direction that BTC’s price goes.

When the Terra and LUNA ecosystem collapsed on itself, the price of Bitcoin underwent a sharp correction due to the multiple liquidations that occurred within Terra and investor sentiment plummeted.

The same happened to an even greater extent when Voyager, 3AC and Celsius collapsed, wiping out tens of billions of investor funds and protocols.

Related: Wen moon? Probably not soon: why Bitcoin traders should befriend the trend

What to expect from the rest of 2022 through 2023

The factors affecting falling prices in the cryptocurrency market are driven by Federal Reserve policy, which means that the Fed’s power to raise, suspend or lower rates will continue to have a direct impact on the price of Bitcoin, the price of ETH and altcoin prices.

Meanwhile, investor risk appetite is likely to remain muted and potential cryptocurrency traders may consider waiting for signs of a spike in U.S. inflation and the Federal Reserve to start using political pivot language.