- Bitcoin dropped below $20,000 yesterday, breaking 10 days of rangebound trading activity
- The world’s largest crypto plunged to its lowest value since mid-June on a near 7% price decrease
- BTC’s drop coincides with Fed’s expected interest rate hike and broader negative market trends
Following a stellar 2021, which saw numerous digital assets reach their all-time price peaks, 2022 has been tough for cryptocurrency markets. The total market capitalization dropped from $3 trillion less than a year ago to sub $1 trillion levels, while Bitcoin, Ethereum, and the majority of other crypto assets are showing drastic decrease in value.
After 10 days of mostly sideways market activity, with Bitcoin changing hands in a very narrow trading range between $19,575 and $20,500, the world’s largest crypto plunged below its lower bound on Tuesday.
Other major market cap cryptos followed in the footsteps of BTC – Cardano and Polkadot lost over 7% each, while BNB, Dogecoin, and Solana experienced roughly 5% price decreases. With a more than 8% price drop, Ethereum saw the most severe bearish activity out of all the top 10 assets, despite the rapidly approaching Ethereum Merge.
Why Bitcoin Plunged beneath $19,000
The reason for Bitcoin’s poor performance cannot be attributed to any single factor. Instead, it is best to take into account several different macroeconomic and crypto-specific factors that are driving negative market activity. Below are the three reasons that are most likely playing an outsized role in Bitcoin’s recent slump.
Investors fear another bout of historic interest rate hikes
After a series of rate hikes throughout 2022, the US Federal Reserve is expected to announce another record increase in the federal interest rate on Thursday. In the two-month period between June and July, the Fed increased interest rates by 1.5 percentage points in total, bringing it to 2.5%. This was a drastic measure when taking into account near-zero interest rates between 2020 and 2022.
The Fed is raising rates in order to fight 40-year high inflation sparked by rising energy prices, the record amount of money in circulation due to Covid-related economic relief efforts and a decade of monetary expansion.
In general, a high-interest rate environment is thought to lead to poor performance of expansionary assets like tech stocks and digital currencies. The interest rate could increase to 3.5% and remain there in 2023, according to a recent report by Financial Times.
The US Dollar Index hits multi-decade highs
On September 6, the US Dollar Index (DXY) hit its highest level since 2020. DXY tracks the strength of the USD against the basket of major currencies, essentially showcasing the strength of the world’s most dominant fiat currency.
With DXY surpassing 110 points, virtually every other fiat currency is showing a negative change against the USD – most prominently the euro, which dropped below the value of the dollar last month for the first time in 20 years.
A strong USD is usually a bearish sign for Bitcoin. The cryptocurrency is typically trading in an inverse relationship with the USD – gaining in value when the USD drops and conversely, losing in value when the USD strengthens.
With more restrictive monetary policy on the horizon according to the Fed, which will most likely result in an even stronger dollar, Bitcoin could see additional selling pressure mount in the coming months.
Lack of investments and broader economic slowdown
The bearish macroeconomic outlook has led to a decrease in investment in cryptocurrency projects over the past couple of months. After reaching $32.1 billion in 2021, total global crypto investment activity is expected to drop to $14.2 billion in 2022, per a newly released report by KPMG.
In addition to a lower amount of capital flowing into crypto and falling prices of digital assets, the broader macroeconomic situation also doesn’t instill confidence for short- and near-term returns.
The war in Ukraine, the tension between the US and China over Taiwan, and logistics problems, are contributing to uncertainty which both the traditional and crypto markets certainly do not appreciate. Bitcoin resulted in a loss of over 50% of its value this year.
Both S&P 500, which is down over 18% year-to-date and Bitcoin’s performance this year, reflect the macroeconomic reality that could result in a recession down the line.
With the Fed expected to prolong its hawkish monetary policy, and European Central Bank (ECB) presumed to do the same later this week, the price of Bitcoin and the majority of digital currencies have broken two weeks of rangebound activity, unfortunately to the bottom.
This reduced inflow of funds and the fear of recession have put the investors in a jeopardy hence, much money is not flowing in the crypto market.
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On a positive note, upcoming crypto developments, such as the Ethereum Merge and Cardano’s Vasil hard fork, could spark some positive market activity in the near future, which could result in Bitcoin regaining its foothold above the $20,000 level.