Why Crypto is Down? The decline in cryptocurrencies is part of a larger retreat from risky assets, which has been fueled by increasing interest rates, inflation, and economic uncertainty induced by Russia’s invasion of Ukraine.
Another bad day for the markets of cryptocurrency. The market is still worried after the giant sell-off due to stable coin TerraUSD insecurity.
LUNA which peaked at $119.18 in the early days of April, is now of no worth, having lost greater than 99% of its value in the last twenty-four hours.
The giant losses are significant, with LUNA now trading at $0.01. So, let’s total the losses.
Bitcoin fell to a 24-hour low of $25,402 earlier today during Asian trading hours. Prior to Bitcoin rising beyond the $29,000 level, this was also a 52-week low.
It’s still down more than 5 percent in the last day, despite an afternoon comeback.
The price of bitcoin has already fallen by 39% so far this year and is now trading far below its all-time high of nearly $69,000 in November 2021.
After falling by almost 13% in the past 24 hours, Ethereum is still trading below the psychological milestone of $2,000.
Stablecoins Risk in Focus
Stablecoins, the proverbial “elephant in the room,” need to be addressed soon. Crypto investors should keep a watch on the volatility of stablecoins, particularly UST and LUNA, since this week’s loss was mostly due to this sector.
TerraUSD’s demise should not come as a surprise to experts who are dubious of the Terra ecosystem’s mechanism underlying it.
All of the Luna Foundation Guard’s (LFG) assets have been transferred to Bitcoin exchanges so that the stablecoin’s dollar peg can be maintained. LFG does not have any bitcoin in reserve at this time.
The first stablecoin, Tether (USDT), has been hit hard by the skepticism around it.
Since its recent drop to $0.97 against the US dollar during Asian trading hours, Tether has rebounded to $0.99. A penny short of its dollar peg is worrisome, to say the least.
Crypto is Now Strongly Correlated with Equities
As a digital-era gold and inflation hedge, many cryptocurrency investors see Bitcoin as the digital equivalent of gold.
Price fluctuations in the cryptocurrency market suggest, however, that the market does not see these extraordinarily volatile commodities as reliable storehouses of wealth in uncertain economic times.
Since its inception, gold has had a negative correlation with stock values, as anticipated in 2022. Gold is up around 3% in 2022, while the S&P 500 is down roughly 16% this year.
Worries about US inflationary pressures, as well as possible Fed moves to mitigate them, have driven stock market selling pressure.
In April, the CPI rose by 8.3% year over year, the highest rate of inflation in the US since 1981. A 50-basis-point interest rate increase by the Federal Reserve earlier this month brought the Fed’s goal [range] to 75 percent to 1 percent.
In a post-announcement press conference, Fed Chair Jerome Powell suggested that more raises of 50 basis points were on the table for the next two FOMC meetings.
The Federal Reserve will begin to release its holdings of US Treasury bonds and mortgage-backed securities in June, a total of $30 billion and $17.5 billion respectively.
Risk assets are likely to continue their downward trend, according to Commonwealth’s senior vice president of investment management and research Brian Price.
At this point in time, the major focus is on the rising cost of living, rising interest rates, and the unrest in Ukraine. Due to a lack of significant positive triggers, the market is starting the week under pressure, which is understandable.
Even if stock prices have plummeted as a result of Fed tightening, cryptocurrency investors have remained steadfast in their positions.
A cryptocurrency is digital or virtual money that is protected by encryption, making counterfeiting or double-spending practically impossible. Many cryptocurrencies are decentralized networks powered by blockchain technology, which is a distributed ledger enforced by a diverse network of computers.
Early Bitcoin, Ethereum, and other cryptocurrency investors earned a fortune. However, the cryptocurrency market has a lengthy history of significant volatility, which is not what investors want under volatile market circumstances.
In reality, Bitcoin has had multiple major pullbacks of more than 80% over its history, including a nearly 80% drop in 2018.
Bitcoin, like most other cryptocurrencies, is not connected to tangible or intellectual property assets, and thus does not create cash flow or pay dividends or interest to investors.
Instead, Bitcoin’s price is solely determined by supply and demand, making it impossible to determine its intrinsic worth, according to experts.
Warren Buffett, CEO of Berkshire Hathaway and an investment icon, recently criticized Bitcoin’s inadequacies during Berkshire’s annual investor conference, telling investors that he would not pay $25 for “all of the Bitcoin in the world.”
“I don’t know if it will rise or fall in the next year, five years, or ten years.” But one thing I’m certain of is that it doesn’t proliferate or generate anything," he said.
Bitcoin and other cryptocurrencies’ volatility and link to other risk assets may ultimately fade.
Nonetheless, the recent price behavior in the cryptocurrency market shows that the rocky ride for crypto investors may continue in the short future.
Should you buy the Dip in Crypto?
Crypto investors should exercise prudence when it comes to purchasing the dip. When asset values fall as quickly as they have in the crypto market in recent days, it might make that coin you’ve been eyeing appear like a steal.
However, ancient Wall Street experts have a saying that perfectly captures situations like this: “Never attempt to catch a falling knife.”
Using your imagination, you should realize that grabbing a falling knife, sometimes known as “buying the dip,” almost invariably ends in agony. That is not to imply that astute investors cannot profit from increased market volatility.
However, the point here is that large, rapid market movements may be disturbing for the average retail investor.
Counterfeiting or double-spending are almost impossible with a cryptocurrency since it is encrypted digital money.
Many cryptocurrencies use blockchain technology, which is a distributed ledger maintained by a varied network of computers, to create decentralized networks.
Cryptocurrencies may be more resistant to political interference or manipulation since they are frequently not issued by a central authority.
Cryptocurrencies are digital or virtual currencies that rely on cryptography technologies to function. They make it possible to make safe online payments without the involvement of third-party middlemen.
When we say “crypto,” we’re referring to the many types of encryption and cryptographic security (such as elliptical curve encryption, public-private key pairs, and hashing functions) used to safeguard these entries.
Blockchain technology is key to the attractiveness and operation of Bitcoin and other cryptocurrencies. Blockchain, as the name implies, is simply a collection of linked blocks or an online ledger.
Each block comprises a collection of transactions that have been independently confirmed by each network participant.
Every new block created must be validated by each node before being confirmed, making forging transaction histories very difficult.
The contents of the online ledger must be agreed upon by the complete network of a single node, or computer that keeps a copy of the ledger.
According to experts, blockchain technology may benefit a variety of businesses, including supply chain, as well as activities such as online voting and crowdfunding.
JPMorgan Chase & Co. (JPM) is investigating the use of blockchain technology to reduce transaction costs by speeding payment processing.
Are Cryptocurrencies Legal?
The government or monetary authorities provide fiat currencies their power as means of exchange. The Federal Reserve, for example, backstops each $1 note.
However, cryptocurrencies are not backed by any government or private entity. As a result, making a case for their legal standing in various financial jurisdictions throughout the globe has proved challenging.
It doesn’t help that cryptocurrencies have mostly operated outside of most current financial infrastructure. The legal status of cryptocurrencies affects their usage in everyday activities and trade.
The Financial Action Task Force (FATF) suggested in June 2019 that cryptocurrency wire transactions be subject to the provisions of its Travel Rule, which requires AML compliance.
El Salvador was the first nation in the world to accept Bitcoin as legal money for monetary transactions as of December 2021. Cryptocurrency legislation in the rest of the world differs by jurisdiction.
The Payment Services Act of Japan declares Bitcoin to be legal property. Cryptocurrency exchanges operating in the nation are required to gather user information as well as wire transfer data.
Within its boundaries, China has prohibited cryptocurrency trades and mining. In December, India was rumored to be developing a cryptocurrency framework.
In the European Union, cryptocurrencies are legal. Derivatives and other products based on cryptocurrency must be classified as “financial instruments.”
The European Commission issued the Markets in Crypto-Assets (MiCA) regulation in June 2021, which defines regulatory protections and requirements for organizations or suppliers offering financial services utilizing cryptocurrency.
Crypto derivatives such as Bitcoin futures are accessible on the Chicago Mercantile Exchange in the United States, the world’s largest and most sophisticated financial exchange.
Bitcoin and Ethereum, according to the Securities and Exchange Commission (SEC), are not securities.
In the global financial system, cryptocurrencies are a hot issue. The exchange rates of cryptocurrency are quite volatile. Trading these cryptocurrencies carries a high level of risk. Many speculators have been interested in their expansion. They are lightweight and portable.
With inflation at an all-time high, stock markets plummeting, and investors concerned about the Federal Reserve’s bold new monetary policy stance, you’d think now would be an excellent moment to gamble on Bitcoin.
There has never been a better moment to possess a decentralized currency that keeps its value. Despite this, the world’s most recognized cryptocurrency has lost more than 37% of its value this year, plummeting to over $26,000 earlier today.
Bitcoin was at an all-time high above $69,000 only six months ago. In contrast, the S&P 500 has fallen almost 17% since the beginning of 2022. Why is Bitcoin experiencing such significant losses in 2022?
Bitcoin is a Risk Asset now
Risk assets are investments that are subject to high volatility in the normal course of the market.
Stocks, commodities, and high-yield bonds are considered risk assets since their values fluctuate regularly in practically every market environment.
Until recently, Bitcoin was thought to be a store of wealth that was relatively resistant to swings in the value of risk assets. That is no longer true.
Today, BTC has succumbed to the same forces that affect the value of risk assets, including as inflation, stock markets, and Fed monetary policy.
“This specific collapse is taking place right now because [crpyto] market narratives have moved from risk-on to risk-off,” said Dr. Richard Smith, creator of the Risk Rituals Newsletter.
“Liquidity is drying up as the Fed and other central banks begin to taper excess stimulus, and also as average people understand that Covid-19 is coming to an end, that we’re going back to work, and that we’re not all purchasing NFTs and moving into the metaverse tomorrow.”
However, another, even more esoteric element has lately been at work in cryptocurrency markets, helping to send Bitcoin further lower.
Bitcoin had a Rough start to 2022
Bitcoin gained over 70% before the end of 2021. That is an excellent return for any asset type. Nonetheless, a 70 percent yearly return is a bit of a letdown for Bitcoin, which gained more than 300 percent in the lockdown-ravaged year of 2020.
Investors are risk-averse in 2022, with “a broad flight to safety across the board in most asset classes,” according to Alex Reffett, co-founder of wealth management company East Paces Group.
“Investors have exhibited a greater interest in value-based investments and less in speculative equities and alternative ‘store of value’ investments as a group.”
One explanation is the Fed, which has raised interest rates twice in a row to battle levels of inflation not seen in the United States in forty years. Analysts anticipate that the central bank will continue to tighten rates far into 2023.
When the Fed raises interest rates, it reduces demand for greater growth businesses such as tech equities and speculative risk assets such as Bitcoin.
It is difficult to predict how much demand for cryptocurrency will exist when all liquidity has dried up.
“We have no historical precedence for how Bitcoin and other cryptocurrencies would behave if we enter a protracted period of central banks aggressively draining liquidity,” said Interactive Brokers’ chief analyst Steve Sosnick.
“Those are often challenging periods for investors, and riskier investments tend to outperform safer assets.”
Bitcoin has become a volatile Giant
Market difficulties caused by Russia’s invasion of Ukraine are also factoring in. “Geopolitical worries are fueling market volatility in many tradable asset classes,” said Reffett.
“Bitcoin has proved to be somewhat connected to broad market movements and less of a direct hedge against equities markets.”
The problem is that Bitcoin hasn’t shown to be a good hedge against anything. After all, with inflation reaching four-decade highs, you’d think a currency that claims to be independent of any central bank would attract more supporters.
Wouldn’t demand for Bitcoin be off the charts if this description applied? Instead, Bitcoin tends to attract supporters when the price is increasing and detractors when sellers dominate much like a risk asset.
Since 2009, Bitcoin has had eight 50 percent losses from its previous all-time high. “Anyone who isn’t willing to accept a 50% drop should avoid Bitcoin,” Dr. Smith advised. “Falls of 50% are quite natural for Bitcoin.” It’s the cost of entry."
Should you own Bitcoin?
Buying Bitcoin used to be confined for tech-savvy early adopters, and a genre of journalism temporarily arose to explain to befuddle readers how to swap dollars for Bitcoin and then Bitcoin for something mundane, like pizza.
Bitcoin has grown more widespread over the years, and it is now easy to purchase via reasonably safe exchanges such as Coinbase.
Today, staid, level-headed money managers like those at Minneapolis-based Leuthold Group argue that a percentage point or two of your portfolio may be allocated to Bitcoin.
“At some time, the market will determine the worth of cryptocurrency and integrate that knowledge into a high level of pricing for those assets,” economist Tyler Cowen said in a Bloomberg essay.
“Thereafter, predicted rates of return will be dare I say it normal.” By buying in Bitcoin today, you’re betting that the speculative mania will continue and you’ll be able to resell it for much more than you bought.
However, recent experience suggests that, however intriguing, such ideas are seldom simple to implement.
To be Precise
The term “Bitcoin,” which may also be referred to as “cryptocurrency,” “virtual currency,” or “digital cash,” is used to describe this new kind of money. It’s like an internet currency. However, not many shops now accept it, and in other countries, it has been forbidden entirely.
Here are some questions about Why Crypto is down:
“The crypto crash is a global one.” As liquidity has dried up as a result of central banks raising interest rates and the dollar index increasing, trading activity in cryptos has decreased, as have prices. Volumes have dwindled, and traders (speculators) have begun to record losses.
The dip came after the stock market entered bear market territory for the first time since early 2020 on Friday. Several variables, including growing inflation, geopolitical crises, and altering monetary policy in the United States, continue to generate more short-term volatility in the cryptocurrency and stock markets.
Bitcoin (BTC) plummeted below $30,000, to $26,597, after the TerraUSD (UST) stablecoin plunged significantly below its $1 peg, adding to the entire market’s negative pressure. According to Fortune’s Sam Bankman-Fried, the bitcoin market will not collapse to zero.
Given the tax system proposed for virtual digital assets, several in the crypto sector and financial professionals have encouraged investors to liquidate their crypto holdings. Positive return investors should strongly consider this, particularly if they are not in the highest tax rate of 30%.
Noble theorizes that some of the decreases are the result of a mix of reasons, ranging from enthusiasm over low-quality coins to harsh statements from Elon Musk to China’s recent ban on crypto services. This confluence of events has the potential to make sell-offs “all the more savage,” according to Noble.
He’s already seeing continuous purchasing on late 2022 and early 2023 crypto options, which are contracts that enable investors to purchase or sell a cryptocurrency asset at a certain date and price. According to him, this implies that investors are likely optimistic about future crypto values, especially Bitcoin.
The second-largest cryptocurrency, Ether ETHUSD +0.39 percent, fell 10% to below $2,500 during the weekend after trading over $2,700 on Friday. It is presently trading at the lowest levels since 2021. Smaller cryptos, or “altcoins,” were not spared, falling further Monday to their lowest level since Friday.
Although cryptocurrency is a virtual money, its value can never go below zero. In summary, a cryptocurrency’s value cannot be less than $0.
Because the Bitcoin ecosystem is continuously evolving, it is plausible, if not probable, that Bitcoin will continue to change over the next several decades. However, no more bitcoins will be created after the 21-million coin cap has been met.
Though bitcoin is considered a dangerous, speculative investment, experts believe that a buy and hold approach is typically the best practice whether you currently possess it or want to acquire.
To sum it up about Why Crypto is down, we can say that Price rises when demand exceeds supply. For example, if there is a drought, the price of grain and produce rises if demand remains constant. The same supply and demand theory applies to cryptocurrencies. When demand exceeds supply, cryptocurrency appreciates in value.