Why is the crypto market down today?

Crypto Prices Continue to Fall, But Why? This year’s market crash has turned most winning portfolios into net losers, and new investors are likely to lose hope in Bitcoin (BTC).

Investors know that cryptocurrencies exhibit higher than average volatility, but this year’s decline was extreme. After hitting an all-time stratospheric high of $69,400, Bitcoin price plunged to an unexpected annual low of $17,600 over the next 11 months.

That is a depreciation of almost 75%.

Ether (ETH), the largest altcoin by market capitalization, also saw an 82% correction as its price dropped from $4,800 to $900 in seven months.

Years of historical data shows that pulls in the 55%–85% range are the norm after parabolic bull market rallies, but the factors weighing on crypto prices today are different from those that caused sell-offs in the past.

At the moment, investor sentiment remains weak as investors avoid risk and wait to see if the Federal Reserve’s current monetary policy will ease the persistence of high inflation in the United States. On Sept. 21, Fed Chair Jerome Powell announced a 0.75% rate hike and hinted that similar magnitude rate hikes would happen until inflation gets closer to the central bank’s 2% target.

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Let’s take a closer look at three reasons why crypto prices will continue to fall in 2022.

Federal Reserve rate hikes

Raising interest rates increases the cost of borrowing money for consumers and businesses. This has the knock-on effect of increasing operating costs, the cost of goods and services, production costs, wages, and ultimately the cost of almost everything.

High, unstoppable inflation is the main reason why the US Federal Reserve is raising interest rates. And since the rate hikes began in March 2022, Bitcoin and the broader crypto market have been in a correction.

When monetary policy or the metrics that measure the strength of the economy shift, risky assets tend to signal or move earlier than stocks. In 2021, the Fed began signaling its plans to eventually raise interest rates, and data shows Bitcoin price sharply corrected in December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled what lay ahead for the stock markets.

If inflation begins to decline, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risky assets like Bitcoin and altcoins could once again be the “canaries in the coal mine” with the return of reflect risk – on investor sentiment.

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The ongoing threat of regulation

The cryptocurrency industry and regulators have a long history of not getting along due to various misconceptions or mistrust about the actual use of digital assets. Without a working framework for crypto sector regulation, several countries and states have a plethora of conflicting policies about how cryptocurrencies are classified as assets and what exactly is a legal payment system.

The lack of clarity on this issue weighs on growth and innovation within the industry, and many analysts believe that mainstreaming cryptocurrencies cannot take place until a more universally agreed and understood set of laws is passed.

Risk assets are heavily influenced by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulation, or worst case scenario, an outright ban, has impacted crypto prices almost monthly.

Scams and Ponzis led to liquidations and repeated blows to investor confidence

Scams, Ponzi schemes and sharp market volatility have also played a major role in crypto prices collapsing in 2022. Bad news and events that jeopardize market liquidity tend to have catastrophic consequences due to the lack of regulation, the youth of the cryptocurrency industry and the market are relatively small compared to the stock markets.

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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 cap in the industry, and historically, altcoin prices have followed the direction of BTC price.

As the Terra and LUNA ecosystem collapsed on its own, Bitcoin price sharply corrected due to multiple liquidations within Terra – and investor sentiment plummeted.

The same happened to an even greater extent when Voyager, 3AC and Celsius collapsed, wiping out tens of billions in investor and protocol funds.

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What to expect for the rest of 2022 to 2023

The factors influencing falling prices within the crypto market are driven by Federal Reserve policies, meaning the Fed’s power to raise, pause, or lower interest rates will continue to have a direct impact on Bitcoin. price, ETH price and altcoin prices.

In the meantime, investor risk appetite is likely to remain subdued, and potential crypto traders may want to consider waiting for signs that US inflation has peaked and the Federal Reserve will start using language indicative of a policy pivot.