Why is Crypto Down and Will it Recover?
The Cryptocurrency market is down from a market cap of $1.01 trillion on August 15th to $1.04 trillion on September 11th. The crashes in August were t largely linked to the minutes released from the last Federal Reserve meeting on August 16th and the Personal Consumption Expenditures Price Index (up 3.3% for July), both signaling potential headwinds for Bitcoin and Altcoins.
Note: Tesla Stock price is down 46% from its peak in November 2021 and down 25% over the last 30 days
Why is Crypto down today? FTX Update, Sep 11th
Why is Crypto down today? CPI Data, Sep 13th
Why is Crypto down today? Federal Reserve’s Stance on Inflation
The minutes from the Federal Reserve’s latest meeting demonstrated a clear concern about inflation rates.
- The policymakers deliberated on rate hikes as a potential countermeasure against mounting inflation.
- The quarter percentage point rate hike resulting from this discussion was anticipated by the markets as the concluding hike for this period.
- Nevertheless, the Federal Reserve’s recent rate hike, targeting the federal funds rate between 5.25%-5%, has achieved a peak unseen in over two decades.
- Despite some officials arguing against further hikes, the overarching sentiment was one of caution. The minutes illustrate a dichotomy: while there’s consensus that inflation is alarmingly high, there’s a simultaneous belief that inflation pressures might be waning.
Why is Crypto down today? Personal Consumption Expenditures Data
The US Personal Consumption Expenditures Price Index (PCE), a key inflation metric preferred by the Federal Reserve, increased by 3.3% YoY in July, aligning with market predictions. Federal Reserve Chair Jerome Powell had forecasted a slightly higher rise, hinting at potential interest rate hikes. However, the higher rates could extend the period for which rate hikes or elevated interest rates could remain. This is not good for cryptocurrencies.
Why is Crypto down today? New Risks?
The minutes also shed light on apprehensions surrounding commercial real estate. The possible steep downturn in commercial real estate valuations has been spotlighted, with its ripple effects feared to impact banks and other financial institutions. This could lead to increased complexity in the Federal Reserve’s decision-making process.
Why is Crypto down today? US Market in Trouble?
Bitcoin’s recent price drop can be attributed to a combination of factors, many of which are related to known factors. But there appears to be another factor – BTC appears to be under more pressure in the US and less in Asia.
- A buildup of short positions in the futures market since mid-July,
- Heightened activity from large Bitcoin holders (whales) leading up to and during the sell-off
- A prevailing negative sentiment among traders, evident from negative funding rates, signals a preference to short-sell.
- Decreased demand in the US as indicated by a negative Coinbase premium
Why is Crypto down today? The Role of Liquidations on Deribit and OKX
Wu Blockchain, a prominent crypto news source, reported that the recent market crash was significantly influenced by large-scale liquidations of Bitcoin (BTC) and Ethereum (ETH) on options exchanges Deribit and OKX. These liquidations were related to gamma and perpetual (perp) contracts. Notably, these two exchanges were responsible for 50% of all liquidations during the crash, even though their combined Open Interest (OI) share was only 17%. This disproportionate rate of liquidation suggests that some major accounts, especially Deribit, faced massive losses, potentially wiping out their positions.
Why is Crypto tanking today? Summary of the 2021 crash and recovery
In 2021, Crypto (See chart for Bitcoin above) began to Tank soon after interest rates were reported at 6% which was in November 2021. The Crash continued until March 2022 when the Fed announced that they would cut the size of their balance sheet. You can see that in the chart below, the Fed began to taper down from March 2022 onwards and this went on until March 2023.
A recovery commenced by the end of 2022 when the Inflation rate began to trend lower. However, the market was constantly eyeing new data and multiple Fed reserve meetings to conclude that there may be still some time for a full Bitcoin recovery. The rise in the Inflation rate this month confirmed the worst fears of the market and there has been a downward pressure after that.
Read: Learnings from the 2018 Recovery
Why is Crypto down today? What Next?
The Federal Reserve’s emphasis on inflation and its potential mitigation strategies directly impact the crypto market. Lower rates and heightened liquidity have fuelled the Crypto market while higher rates and lower liquidity have not supported the cryptocurrency market.
Recent data indicates that the inflation rate is currently distant from the Federal Reserve’s 2% target, though there has been notable progress since its peak in June 2022. Historical trends from the 1970s remind us of the risks involved in prematurely retracting stringent monetary policies. The recent rate hikes, while intended to temper the economy, haven’t dented its growth. With promising GDP gains and sturdy employment figures, the economic outlook is not bleak. While there could possibly be 1-2 additional rate hikes, we are possibly at the end of the liquidity squeeze period.
A recovery is likely when the reported Inflation rate starts to trend lower again.
Note: Crowdwisdom360 collates Predictions and data from all over the net and has no in-house view of the likely trends in Cryptos or Stocks. Please consult a registered investment advisor to guide you on your financial decisions.