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Crypto expert reveals what the crash means for the future of cryptocurrency
Bitcoin and altcoins plunged amid a bear market – Antony Portno, Managing Director at Traders of Crypto, explains the causes of the crypto crash and what it means for the future of cryptocurrency around the world.
Bitcoin has fallen to its lowest point in about 18 months, trading just above $21,000 on Thursday morning. At the same time, almost all other cryptocurrencies have also been suffering staggering price drops, most in double-digit figures. The global cryptocurrency market cap has shrunk by more than $1 trillion since 2021.
Due to the fragmented and unregulated nature of the cryptocurrency market, it is hard to tell with certainty why it is crashing, but some of the likely contributing factors are outlined below:
The Nasdaq index has had its biggest monthly drop since the 2008 financial crisis and that has been terrible news for cryptocurrencies like bitcoin. According to Arcane Research, the correlation between Bitcoin and the Nasdaq is nearly 0.82 – which means that when the Nasdaq falls, Bitcoin is likely to follow. A likely explanation is that Bitcoin and the Nasdaq are both technology-related investments and are therefore likely to attract the same category of investors.
Aggressive Federal Reserve – After years of easy monetary policy, the Federal Reserve has started to take away the intoxicating mix of excess liquidity and easy money that has enabled risky assets like crypto to do well. In general, investors have a lower appetite for holding high-risk assets like crypto when interest rates are higher. This is in part driven by the fact that other assets (like bonds) now have higher returns, and so some investors switch over to get those lower-risk and now higher returns.
While in current circumstances, it is hard to make a prognosis on the direction of cryptocurrencies in the near future, here are some factors one should take into consideration:
After Friday’s news that inflation in the U.S. had reached a 40-year high, the Federal Reserve has hiked its benchmark interest rate by 0.75 percentage point, the most aggressive increase since 1994.
The Federal Reserve’s actions to increase interest rates and tighten monetary policy are intended to slow down the U.S. economy. The big risk is that the Federal Reserve over does it, and as a result, the U.S. economy slows down too much, and the U.S. enters a recession. In that scenario, risky assets could have a further fall.
As noted above, cryptocurrencies have a tendency to correlate with stocks and other risk assets. While the stocks are officially in a bear market, we are likely going to see crypto prices plunge further. Looking at the historic bitcoin position in bear markets, its current drop is around 80% from its last record high, which would imply that there is still potential for further fall.
Coinbase, one of the biggest market players, is expecting a crypto winter as it has announced plans to lay off 18% of its workers.
On the other hand, it is important to note that bitcoin specifically appears to be in the oversold zone, which essentially means that there is potential for it to still rebound.
Credit the experts at Traders of Crypto.