Crypto prices are falling, and it seems like there’s no bottom in sight — here are 3 reasons why the cryptocurrency market is down.
Bitcoin (BTC) and altcoin prices continue to fall on Oct. 11 as BTC struggles to reestablish the $19,000 level as support. The decline in crypto prices contrasts against the sharp rebound seen in equities markets where the Dow and S&P 500 have etched out respective 1.14% and 0.38% gains. The Nasdaq is nursing a minimal 3.57-point loss and still trades near its yearly low at 10,354.
Given the high correlation between crypto and equities markets, Bitcoin’s price action tends to follow the direction of the S&P 500 and the Dow, but that is not the case this week. The most likely culprit is a host of economic events occurring in mid-October, and these could be amplifying investors’ aversion to risk assets.
The following dates highlight important economic events that have a history of impacting investor sentiment in the crypto market:
- Oct. 12: Federal Open Market Committee (FOMC) minutes
- Oct. 12: Consumer Price Index (CPI) report
- Oct. 17: Q3 earnings season begins
- Oct. 28: Personal Consumption Expenditures (PCE) price index
In addition to these upcoming events, the strength of the United States dollar and what appears to be a serious escalation in the conflict between Ukraine and Russia continue to weigh on all markets.
Let’s take a deeper look into three reasons why crypto prices keep falling in 2022.
Federal Reserve interest rate hikes
Raising interest rates increases the cost of borrowing money for consumers and businesses. This has the knock-on effect of raising business operational costs, the costs of goods and services, production costs, wages, and eventually, the cost of nearly everything.
High, unsupressable inflation is the primary reason the United States Federal Reserve is raising interest rates. And since rate hikes 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 shift, risk assets tend to signal, or move, earlier than equities. In 2021, the Fed started signaling its plans to raise interest rates eventually, and data shows Bitcoin price sharply correcting by December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled what lay ahead for equities markets.
If inflation begins to taper, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risk assets like Bitcoin and altcoins could again be the “canaries in the coal mine” by reflecting the return of risk-on sentiment from investors.
The persistent threat of regulation
The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets. Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.
The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.
Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.
Scams and Ponzis triggered liquidations and repeat blows to investor confidence
Scams, Ponzi schemes and sharp market volatility have also played a significant role in crypto prices crashing throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry and the market being relatively small compared with equities markets.
The implosion of Terra’s LUNA and Celsius Network as well as misuse of leverage and client funds by Three Arrows Capital (3AC) were each responsible for successive blows to asset prices within the crypto market. Bitcoin is currently the largest asset by market capitalization in the sector, and historically, altcoin prices tend to follow whichever direction BTC price goes.
As the Terra and LUNA ecosystem collapsed on itself, Bitcoin price corrected sharply due to multiple liquidations occurring within Terra — and investor sentiment tanked.
The same happened with even greater magnitude when Voyager, 3AC and Celsius collapsed, erasing tens of billions in investor and protocol funds.
What to expect for the rest of 2022 through 2023
The factors impacting falling prices within the crypto market are driven by Federal Reserve policy, meaning the Fed’s power to raise, pause or lower rates will continue to have a direct impact on Bitcoin price, ETH price and altcoin prices.
In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that U.S. inflation has peaked and for the Federal Reserve to begin using language that is indicative of a policy pivot.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.