Why Are Crypto Prices Dropping? The following are the 5 main causes

Why Are Crypto Prices Dropping

Why Are Crypto Prices Dropping?

Why Are Crypto Prices Dropping? The price of Bitcoin and other crypto assets continues to decline, raising many questions and concerns. Moreover, previously Bitcoin was often referred to as an inflation hedge with a limited number of only 21 million coins.

Then, why did crypto prices drop drastically since the end of last year?

Why Are Crypto Prices Dropping
Cryptocurrency Market | Pixabay Property

Cryptocurrencies News Summary

  • Since recording an all-time-high in November 2021, Bitcoin price has continued to decline to move in the range of US$20,000 in mid-June 2022 or has fallen as much as 70% from an all-time-high of US$68,000 late last year.

  • Not only Bitcoin and other crypto assets experienced a decline, the shares of technology companies such as Facebook and Netflix also experienced a decline in price of 45% and 68% in this period.

  • One of the factors causing crypto prices to fall along with technology company stocks is the policy to increase interest rates by the Fed (United States Central Bank), to curb inflation. However, this policy will increase loan interest rates and it is feared that it will hamper economic growth.

  • The geopolitical situation with the Russian invasion of Ukraine, and fears of a recession following rising interest rates have also contributed to the decline in crypto and stock prices.

  • Not only that, the LUNA and UST crashes at the end of May 2022 further reduced investor confidence in crypto and helped cut the crypto market capitalization.

What are the Factors Affecting the Decline in Crypto Prices?

The price of Bitcoin which has doubled from the range of US$27,000 at the end of 2020 to US$64,000 in mid-2021 is one of the factors that has triggered an increase in the number of crypto investors in Indonesia. Coupled with the emergence of various crypto projects including L1 tokens such as Cardano (ADA) whose value soared to 2,600%, and also gaming tokens such as Axie which rose to 4,600% by mid-2021.

Although it had dropped back to the range of 31,000 US dollars in mid-2021, Bitcoin again scored an all-time-high in November 2021 with a price reaching 68,000 US dollars.

However, since late November 2021, the price of Bitcoin has continued to decline. As of early June 2022, Bitcoin is moving in the price range of US$30,000 or has fallen by 40% from the all-time-high in November 2021. Not only that, the overall crypto market cap has decreased to US$1.22 trillion.

The following are some of the reasons Why Are Crypto Prices Dropping drastically this time.

Why Are Crypto Prices Dropping
Bitcoin Price Today | Source Kucoin.com

1. The Fed’s Policy Against Inflation and Raising Interest Rates

The first factor Why Are Crypto Prices Dropping. The Federal Open Market Committee (FOMC) on May 4 announced an increase in interest rates of 50 basis points, or 0.5%. This is the second of seven adjustments expected to be announced this year. In March, the Federal Reserve (The Fed) raised its benchmark interest rate by 25 basis points, or 0.25%, which was the first increase since 2018.

Since the Fed’s announcement to raise interest rates, the stock and crypto markets have been met with mixed reactions. The pressure on equity and crypto markets is quite strong, with Bitcoin losing around -6.5% of its value on May 7, 2022, or days since the FOMC announcement.

Bitcoin lost around -6.5% of its value on May 7, 2022, or a few days since the FOMC announcement.

Then, on June 15, the Fed again raised its benchmark interest rate by 75 basis points. The rate hike this time was the largest in 28 years. The Federal Open Market Committee (FOMC) said in a statement that it decided to raise the target range for the federal funds rate to a range of 1.5%-1.75%. This shows the US Central Bank’s aggressive stance to tame inflation, which is currently at the level of 8.6 percent.

Following the Fed’s announcement, the stock and crypto markets reacted positively the day after. However, BTC then declined and continued to fall. Over the past week, BTC is down by -29%, while ETH is down by -31% at the time of writing (June 18, 2022). BTC’s market cap has fallen to 355 billion US dollars, and its dominance has dwindled to more than 44%.

2. Higher Correlation between Crypto and Equity Markets

Next Factor Why Are Crypto Prices Dropping. Currently the crypto market is highly correlated with the equity market, especially the NASDAQ. Thus, negative equity market movements make the crypto market sensitive and down as well. For years, Bitcoin was considered a hedge against inflation. This will not be the case in 2022, however. In January this year, Bitcoin reached its highest level of correlation with the S&P 500 and Nasdaq since 2020.

As US interest rates rise, assets that are considered risky and volatile such as cryptocurrencies and stocks will be under more selling pressure than other assets. For now, the prices of tech and crypto stocks have fallen in tandem.

3. Fears of a Recession

Why Are Crypto Prices Dropping? Rising interest rates make borrowing more expensive and help fight inflation by dampening demand. However, rising interest rates fueled fears of a recession coming, as such policies would weaken economic growth. This fear of a recession is one of the causes of the recent weakness in the stock and crypto market.

Fears of a recession will result in a reduced rate of interest in investing in sectors that are considered high risk, such as stocks and cryptocurrencies.

Also read: Car Insurance Memes: 9 Hilarious Car Insurance Memes for All the Car Enthusiasts

Why Are Crypto Prices Dropping
Cryptocurrency Market | Pixabay Property

4. Geopolitical Conditions (Russia vs. Ukraine)

In early June 2022, the World Bank warned that hopes for averting a recession were fading as the war in Ukraine continued. The war in Ukraine led to a food and fuel crisis. The sharp rise in commodity prices has been the most direct economic impact of the Ukraine conflict. This is one of the factors that affect the global economy Why Are Crypto Prices Dropping too.

On the first day of the Russia vs Ukraine invasion on February 24, 2022, there was panic in the market and investors were more dominant in avoiding risk by selling risky assets such as stocks and cryptocurrencies. Bitcoin, which is considered a risky investment asset, experienced a significant drop in price and fell to US$34,000 from US$40,000. At the same time, global stocks slumped, while the dollar, gold and oil prices skyrocketed higher as investors scrambled for safe-haven assets.

5. LUNA & UST Crash

Huge Impact Why Are Crypto Prices Dropping. Starting from May 7, 2022, UST experienced depeg or no longer worth the same as the US dollar, and fell to 0.06 US dollars on May 13, 2022. As a result, the LUNA token experienced hyperinflation in an effort to stabilize the value of UST. The price of LUNA also fell 100% to the level of 0.0002 US dollars.

Not only driven by macro and geopolitical situations, the decline in the value of Bitcoin and other crypto assets is also caused by various situations within the crypto industry itself. On May 13, stablecoin Terra, UST, which is pegged at 1:1 to the US dollar, fell to a mere 0.06 US dollars.

The occurrence of the Ministry of Religion, or the fall in the price of UST, resulted in a decline in the price of LUNA, Terra’s “protocol token” which functions to keep the value of UST on par with the US dollar. As of May 13, 2022, several crypto asset exchange platforms are no longer trading LUNA as its price has continued to fall to only US$0.0002 from US$80 a week earlier.

At the peak of the UST ministry (10-12 May 2022), Bitcoin experienced its first decline to 27 thousand US dollars since July 2021. If we adjust for Terra’s response, this corresponds to the time when Luna Foundation Guard (LFG) sold around 80 thousand its BTC reserves in an effort to overcome the ministry of finance. This massive sale brought down the price of Bitcoin and took the entire crypto market with it.

Plus, US crypto-asset lender Celsius recently froze withdrawals and transfers between accounts, further fueling fears of a broader downturn in a digital asset market already shaken by the LUNA and UST crashes last month.

Leave a Reply

Your email address will not be published. Required fields are marked *