Cryptocurrency prices keep dropping, but why? The market crash this year has turned most winning portfolios into net losses, and new investors may lose hope in Bitcoin (BTC).
Investors know that cryptocurrencies are showing above-average volatility, but the decline this year has been severe. After hitting an all-time high of $69,400, the price of Bitcoin plunged over the next 11 months to an unexpected annual low of $17,600.
This is approximately 75% decrease 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 shows that 55%-85% retracements are the norm after equivalent bull market rallies, but the factors affecting cryptocurrency prices today are different from those that led to sell-offs in the past.
For now, investor sentiment remains weak as investors avoid risks and wait to see if the current monetary policy of the Federal Reserve will mitigate the persistently high inflation in the US. On September 21, Federal Reserve Chairman Jerome Powell announced a 0.75% rate hike and hinted that similar increases in size would occur until inflation fell close to the central bank’s 2% target.
Let’s take a deeper look at three reasons why cryptocurrency prices will continue to drop in 2022.
Fed rate hike
Raising interest rates increases the cost of borrowing money for consumers and businesses. This has the indirect effect of increasing the operating costs of the business, the costs of goods and services, the costs of production, wages, and ultimately the cost of almost everything.
Uncontrollable high inflation is the main reason why the US Federal Reserve raised interest rates. And since the price hike began in March 2022, bitcoin and the broader crypto market have been in a correction.
When monetary policy or metrics that measure the strength of the economy change, risk assets tend to signal or move ahead of stocks. In 2021, the Fed began signaling its plans to eventually raise interest rates, and data shows a sharp correction in the price of Bitcoin by December 2021. In a way, Bitcoin and Ethereum were the Canary Islands in the coal mine indicating what awaits the stock markets.
If inflation begins to taper off, the health of the economy improves, or the Fed starts signaling a pivot in its current monetary policy, risky assets like bitcoin and altcoins could once again become the “Canary Islands in the coalmine” by reversing the return Risk – on investor sentiment.
The constant threat of regulation
The cryptocurrency industry and regulators have a long history of incompatibility either due to various misconceptions or mistrust in the actual use case of digital assets. Without a framework to regulate the crypto sector, different countries and states have a large number of conflicting policies on how to classify cryptocurrencies as assets and what constitutes a legal payment system.
The lack of clarity on this issue affects growth and innovation within the sector, and many analysts believe that the popularization of cryptocurrencies cannot occur until a set of laws that are agreed and universally understood are in place.
Risk-taking assets are heavily influenced by investor sentiment, and this trend extends to Bitcoin and altcoins. So far, the threat of unfriendly cryptocurrency regulations or, in the worst case, outright bans, continues to affect crypto prices on an almost monthly basis.
Scams and Ponzis led to liquidations and repeated blows to investor confidence
Scams, Ponzi schemes, and sharp market volatility have also played a significant role in the cryptocurrency price crash throughout 2022. Bad news and events that jeopardize market liquidity tend to have disastrous outcomes due to the lack of regulation and the youth of the cryptocurrency industry and market. Being relatively small compared to the stock markets.
The collapse of Terra’s LUNA and Celsius network as well as the misuse of leverage and client funds by Three Arrows Capital (3AC) were responsible for the cascading blows to asset prices within the cryptocurrency market. Bitcoin is currently the largest asset by market capitalization in the sector, and historically altcoin prices tend to follow whatever direction BTC price is trending.
With the Terra and LUNA ecosystem crashing in on itself, Bitcoin’s price has corrected sharply due to the multiple liquidations taking place within Terra – and investor sentiment has collapsed.
The same thing happened with greater volume when Voyager, 3AC and Celsius collapsed, wiping out tens of billions of investor and protocol money.
Related: One Moon? Maybe Not Soon: Why Bitcoin Traders Should Make Friends With the Trend
What to expect in the remainder of 2022 through 2023
Factors influencing price declines within the cryptocurrency market are driven by Federal Reserve policy, which means that the Fed’s ability to raise, pause, or lower prices will continue to directly influence the price of Bitcoin, the price of Ethereum, and the price of the altcoin.