Why is the cryptocurrency market down today?

Cryptocurrency Prices Keep Falling, But Why? This year’s market crash has turned the top-grossing portfolios into net losers, and new investors are probably losing hope in Bitcoin (BTC).

Investors know that cryptocurrencies have higher than average volatility, but this year’s decline has been extreme. After hitting an all-time stratospheric high of $69,400, the price of bitcoin fell to an unexpected annual low of $17,600 over the next 11 months.

That’s about a 75% reduction in cost.

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 that declines in the 55%-85% range are the norm after parabolic bull market rallies, but the factors driving cryptocurrency prices today differ from those that drove selloffs in the past.

Investor sentiment currently remains soft as investors are risk-averse and wait to see if the Federal Reserve’s current 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 signaled similar hikes until inflation approaches the central bank’s 2% target.

Let’s take a deeper look at three reasons why cryptocurrency prices will fall in 2022.

The Federal Reserve raises interest rates

Rising interest rates increase the cost of borrowing money for consumers and businesses. This has the effect of increasing business transaction costs, costs of goods and services, production costs, wages and ultimately the cost of almost everything.

High, unstoppable inflation is the main reason the US Federal Reserve raises interest rates. And since 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, risk assets tend to signal or move earlier than stocks. In 2021, the Fed finally started hinting at plans to raise interest rates, and data suggests that the price of Bitcoin has corrected sharply by December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that showed what was in store for the stock markets.

If inflation begins to decline, the health of the economy improves, or the Fed begins to signal a reversal in current monetary policy, risk assets such as Bitcoin and altcoins may once again become “canaries in the coal mine,” reflecting the return of risk. – investor sentiment.

The threat of continued regulation

The cryptocurrency industry and regulators have a long history of not getting along due to various misconceptions or mistrust of the actual use of digital assets. Without a working framework for regulating the cryptocurrency sector, different countries and states have many conflicting policies regarding the classification of cryptocurrencies as assets and what constitutes a legitimate payment system.

The lack of clarity on this issue is impacting growth and innovation in the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until more universally agreed upon and understood laws are passed.

Risk assets are highly influenced by investor sentiment, and this trend also applies to Bitcoin and altcoins. To this day, the threat of unfriendly cryptocurrency regulations or, at worst, an outright ban continues to affect cryptocurrency prices on a nearly monthly basis.

Scams and Ponzis led to liquidations and repeated blows to investor confidence

Scams, Ponzi schemes, and extreme market volatility have also played a significant role in the fall in cryptocurrency prices throughout 2022. Bad news and events disrupting market liquidity have disastrous consequences due to the lack of regulation, the youth of the cryptocurrency industry and the market. relatively small compared to stock markets.

The implosion of Terra’s LUNA and Celsius Network, as well as the abuse of leverage and client funds by Three Arrows Capital (3AC), were responsible for a series of shocks to asset prices in the cryptocurrency market. Bitcoin is currently the largest asset by market capitalization in the sector, and historically altcoin prices have tended to follow whatever direction the BTC price goes.

As Terra and the LUNA ecosystem collapsed on themselves, the Bitcoin price corrected sharply due to multiple cancellations within Terra, and investor sentiment waned.

The same thing happened on a larger scale when Voyager, 3AC and Celsius crashed, wiping out tens of billions of investors and protocol funds.

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What to expect from 2022 to 2023

The factors that affect price declines in the cryptocurrency market are driven by Federal Reserve policy, meaning that the Fed’s authority to raise, suspend, or lower rates will continue to have a direct impact on Bitcoin price, ETH price, and altcoin prices.

Meanwhile, investors’ risk appetite is likely to remain subdued, and potential cryptocurrency traders may want to consider waiting for signs that US inflation has peaked and the Federal Reserve is beginning to use language indicative of policy direction.