Extreme volatility in cryptocurrency markets has resulted in a steep drop in the price of Bitcoin (BTC) during the past several months.
As of this writing, Bitcoin is trading at roughly $21,000, down 10% in the last five days. In the past 24 hours, the value of the original cryptocurrency has dropped by around 4%, and the value of other cryptocurrencies has followed suit.
The main alternative currency, Ethereum, has dropped in value by about 9 percent in the past day. Anxieties over an impending Federal Reserve rate hike have skyrocketed, while interest in Ethereum’s “merge” update has waned.
It’s expected that the Federal Reserve will raise interest rates at its June 26-27 meeting. Experts on Wall Street are expecting a hike of 75 basis points (bps).
However, many think the Fed cannot do anything because U.S. inflation has risen to levels not seen in almost four decades. CoinMarketCap.com reports that the total value of the cryptocurrency market has dropped below $960 billion. Bitcoin Blast is an excellent option for those interested in making money through gaming on their mobile devices.
The Bitcoin Market’s Most Challenging Areas
Starting in the middle of May, Bitcoin’s price ranged from $28,000 to $32,000; on June 18, it dropped to a 52-week low of $17,708. It was speculated that a lack of cash flow was a factor in the downturn of some cryptocurrency enterprises.
A cryptocurrency lending site called Celsius suddenly halted withdrawals a few days before Bitcoin struck rock bottom, claiming “extreme market conditions.” All withdrawals and transactions have been stopped by Celsius since June 13. The cryptocurrency firm went insolvent on July 13 after a month of turmoil.
On or around June 16–17, it became public that Three Arrows Capital (3AC), a crypto hedge fund based in Singapore, had gone bankrupt.
On June 27, Voyager Digital’s $350 million loan fell into default, resulting in the loss of USD Coin (USDC) and almost 15,250 BTC. To fill up the blanks, 3AC was a significant investor in TerraUSD/LUNA, the stablecoin that crashed last month.
In the wake of the failures of other cryptocurrency lending platforms like BlockFi, Voyager, and Celsius, 3AC’s bankruptcy was inevitable.
Compared to its all-time high of almost $69,000 in November 2021, the bitcoin price is currently trading at a substantial discount. Analysts also believe that the decline in BTC’s value alongside the stock market means it is no longer being held as a hedge against inflation.
The gloomy sentiment that engulfed the Bitcoin market in the middle of June was primarily attributable to the decentralized financing (Defi) platform Celsius, one of the top crypto lenders.
Due to its attractive annual percentage yield (APY) of 18% on bitcoin deposits, Celsius has amassed a cult following in the cryptocurrency market, with up to 1.7 million customers.
The company accepts bitcoin deposits and functions much like a bank by making loans to other investors and financial institutions. Earnings for users are a direct result of the cryptocurrency lending business conducted by Celsius.
The company’s AUM dropped to $11.8 billion on May 17 from more than $26 billion in October of the previous year. Since June, the whole AUM has been hidden on the company website.
The Year 2022 Began Roughly For Bitcoin
Bitcoin saw a gain of almost 70% in value throughout 2021. That’s a great return on any asset type but especially impressive for something that doesn’t have the backing of physical assets or the government’s ability to pay.
After a 300% increase in 2020, a year plagued by lockdowns, Bitcoin’s current year return of 70% represents a decrease.
Investors are risk-averse in 2022. They have taken “a broad flight to safety across the board in most asset classes,” as Alex Reffett, co-founder of East Paces Group, a wealth management firm, put it. Investors are showing less enthusiasm for speculative stocks and other non-traditional “store of value” assets than they are for value-based investments.
Interest rates are being increased for the fourth time this year by the Federal Reserve, and another increase is anticipated in July.
Inflation like this hasn’t been seen in forty years, and the Fed is working to stop it. However, most market watchers expect the central bank to keep raising rates through the end of the year and into 2023, but the exact number of hikes is still unknown. According to some forecasts, the Fed Funds Rate may rise to 3.5 percent or higher by year’s end.
The Federal Reserve’s decision to raise interest rates has dampened investor enthusiasm for growth companies like technology equities and speculative risk assets like Bitcoin and cryptocurrencies.
After all the liquidity has dried up, it is unknown how much demand there will still be for cryptocurrencies.
Sosnick, the senior strategist at Interactive Brokers, claims that “we have no historical pattern for how Bitcoin and other cryptos might perform if we enter a sustained period where central banks purposefully drain liquidity.” Investors lose money when economic conditions are bad because riskier assets don’t do as well.
Bitcoin Is a High-Risk Investment
Many market occurrences, including those that don’t seem out of the norm, can cause “risky” asset prices to swing wildly.
As a result of their high price volatility, equities, commodities, high-yield bonds, currencies, and Bitcoin are all considered risk assets.
Bitcoin was initially considered a haven from the gyrations of the value of risk assets. It is not the situation now. Bitcoin and the broader cryptocurrency market are now affected by economic factors that alter the relative importance of risk assets, such as inflation, stock markets, and Fed monetary policy.
Market narratives have shifted from risk-on to risk-off, as noted by Richard Smith of the Risk Rituals Newsletter, and this shift is the reason for the current decline. In other words, “liquidity is drying up” as the Federal Reserve, and other central banks begin to decrease their excessive stimulus.
Those who have traded Bitcoin before know to expect bear markets. More than 80% of Bitcoin’s value was wiped off between 2017 and 2018. Yet that was before institutional investors like Fidelity and PayPal began pouring billions of dollars into the cryptocurrency sector.
Any newcomers to the cryptocurrency market should be armed with the tenacity to stick with Bitcoin through the inevitable hard patches.