The price of Bitcoin (BTC) has declined substantially over recent months, thanks to significant instability in cryptocurrency markets.
BTC is hanging around $21,000, down 10% over the last five days as of this writing. The original crypto has declined roughly 4% in the previous 24 hours, with other cryptocurrencies heading south, too.
Ethereum, the leading altcoin, has lost roughly 9% in the last 24 hours. The enthusiasm surrounding Ethereum’s upgrade, known as the “merge,” has dissipated, while anxieties about the imminent Federal Reserve’s rate hike have soared.
The Federal Reserve is poised for another rate hike during its June 26-27 meeting. Wall Street analysts are forecasting a 75 basis point (bps) increase.
However, experts say the Fed has practically no choice, as U.S. inflation has soared to levels not seen in over four decades. The whole cryptocurrency market capitalization is now below $960 billion, according to data from CoinMarketCap.com.
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Bitcoin Resistance Points
Bitcoin started trading lower from its mid-May range of $28,000 to $32,000 and hit a 52-week low of $17,708 on June 18. Several crypto firms were said to be experiencing a liquidity shortage, which contributed to the decline.
Celsius, a cryptocurrency lending platform, temporarily suspended withdrawals a few days before Bitcoin hit rock bottom, citing “extreme market conditions.” Since June 13, Celsius has blocked all customer withdrawals and transactions. After a month of upheaval, the cryptocurrency startup filed for chapter 11 bankruptcy protection on July 13.
The insolvency of Singapore-based crypto hedge fund Three Arrows Capital (3AC) was revealed around June 16-17, adding to the growing pile of defaults among cryptocurrency-related businesses.
Defaulting on a loan from Voyager Digital totaling $350 million in crypto assets, including USD Coin (USDC) and nearly 15,250 BTC, occurred on June 27. To fill in the blanks, 3AC was a big backer of TerraUSD/LUNA, the coin at the center of last month’s stablecoin crash.
Bankruptcy for 3AC was inevitable after a string of crypto lender liquidations, including those of BlockFi, Voyager, and Celsius.
Trading at a significant discount to its all-time high of about $69,000 in November 2021, the price of bitcoin has fallen by nearly 56% year to date. Furthermore, analysts claim that BTC is no longer used as a hedge against inflation because its price has fallen in tandem with the equity market.
The decentralized financing (Defi) platform Celsius, also one of the largest crypto lenders, was a significant factor in the bearish feeling that permeated the Bitcoin market in the middle of June.
Celsius has gained a cult following in the cryptocurrency industry, with up to 1.7 million subscribers, by promising users an annual percentage yield (APY) of up to 18% on their cryptocurrency deposits.
The business operates similarly to a bank in that it accepts cryptocurrency deposits and then lends those funds to other investors and financial organizations. Users receive returns from Celsius’s crypto-borrowing revenue.
As of May 17, the firm’s AUM was $11.8 billion, down from more than $26 billion in October last year. The company’s website no longer shows the entire AUM since June.
Bitcoin Had a Rough Start to 2022
Throughout 2021, Bitcoin gained roughly 70%. That’s an excellent rate of return on any asset class, much less one that isn’t backed by anything physical or the full faith and credit of a national economy.
Still, Bitcoin’s annual return of 70% is a drop after its 300% surge in 2020, a year plagued by lockdowns.
In 2022, investors are wary of taking chances. They have adopted “a broad flight to safety across the board in most asset classes,” as noted by Alex Reffett, co-founder of East Paces Group, a wealth management organization. Speculative stocks and other non-traditional “store of value” assets have seen less interest from investors than value-based investments.
The Federal Reserve is raising interest rates for the fourth time this year, and they are expected to do it again in July.
The Fed is attempting to stem an inflationary wave unprecedented in the last forty years. It is unknown how many more rate increases there will be, but experts predict the central bank will continue hiking rates through the end of the year and into 2023. Some projections place the Fed Funds Rate at 3.5 percent or higher by the end of the year.
A decrease in demand for growth firms, such as technology stocks, and speculative risk assets, such as Bitcoin and cryptocurrencies, is a direct result of the Federal Reserve’s increasing interest rates.
It is unclear how much demand there will still be for cryptocurrencies after all the liquidity has dried up.
According to Interactive Brokers’ senior strategist Steve Sosnick, “we have no historical precedence for how Bitcoin and other cryptos might perform if we enter a sustained period when central banks deliberately drain liquidity.” When economic conditions are poor, investors face losses as riskier investments underperform.
Bitcoin Is a Risk Asset
Assets considered “risky” typically exhibit high price fluctuation levels in the ordinary course of market events.
Risk assets include stocks, commodities, high yield bonds, currencies, and Bitcoin due to the extreme volatility of their prices.
Bitcoin was once considered a haven from the ups and downs of the value of risk assets. In modern times, such is no longer the case. Economic phenomena that shift the prominence of risk assets, such as inflation, stock markets, and Fed monetary policy, now impact Bitcoin and the broader crypto market.
According to Richard Smith of the Risk Rituals Newsletter, market narratives have moved from risk-on to risk-off, which explains why this particular downturn is happening this year. As the Federal Reserve and other central banks begin to reduce their excessive stimulus, “liquidity is drying up.”
Bear markets are nothing new for those with trading experience in Bitcoin. Throughout 2017 and 2018, the value of Bitcoin dropped by more than 80%. But that was before giants like Fidelity, and PayPal put down billions to enter the cryptocurrency market.
New cryptocurrency investors should have the fortitude to persevere with Bitcoin through thick and thin.