The cryptocurrency market started the week with a decrease of more than 10% in its values compared to the previous day.
Bitcoin is almost 50% off its all-time high. Why is this happening?
Monday has been a difficult day for cryptocurrency investors after bitcoin (and the entire market) suffered a sharp decline in its value in global markets.
The largest cryptocurrency in the world by market capitalization has touched the value of 30 thousand dollars per unit , according to market analysis source CoinMarketCap, a drop of up to 10% compared to the last 24 hours. Even just a week ago, the value of bitcoin was almost close to 40 thousand.
This decline led to the fall of the vast majority of more than 10,000 cryptocurrencies, going through a setback stage that has alarmed users who invest in these currencies.
Why did the value of bitcoin fall?
The crypto market is characterized by its high volatility, with rises and falls in a matter of hours or minutes. However, the trend of the last few days has been accentuated towards the negative and some points of context can be used as an argument.
“There are two possible arguments that can currently be discussed. The first is a (traditional) market issue,” says Carlos Bernos, Country Manager of the cryptocurrency exchange Buda.com . “If you see, for example, the main stock market indicators, you will see that they have also fallen. The market has gone down and it is correlated with cryptocurrencies. There are a lot of stocks that have fallen and there being a correlation, although difficult to determine at what level, it has splashed the crypto market.”
Precisely, there is a specific issue that has become relevant in recent days. The United States Federal Reserve (Fed) announced the increase of half a point in interest rates in the country, in an attempt to control inflation. The rise of this 0.5 is the highest in the last 20 years. Jerome Powell, president of the Fed, pointed out that he is confident that this policy “will not hit the country’s economic activity” and tried to appease the reactions of economists who pointed out that it will result in an “economic slowdown”.
“By raising interest rates or yields on classic instruments, there is also a disincentive to continue trying to invest in new instruments such as cryptocurrencies ,” says Omar Azañedo Sayán, economist and founder of Noncash . “Swallow capitals are like this: as interest rates on classic instruments rise, people back down and affect cryptocurrencies, just as it affects our stock market or assets in emerging countries.”
Likewise, “it has been announced that unemployment is higher than expected and that inflation is too,” he says.
“If we take the all-time high of bitcoin ($68,900 about 6 months ago), today we are talking about a drop of more than 50%, which occurs in a context of tightening monetary policies in the world to contain inflation,” he recalls. Matías Romero, Country Manager of the Buenbit cryptocurrency exchange .
This fear is also reinforced by the “highly uncertain” impact of external factors, such as the Russian invasion of Ukraine and even the total confinement of people in China to prevent new waves of COVID-19 in the country, which has suspended the circle of activity in supply chains.
Bernos also explained a new argument for the decline in the value of bitcoin. “The second (reason) is that there has not been any event in recent months that escalates the crypto issue strongly. I’ll give you an example: last year, in the first quarter, what bitcoin climbed was Tesla’s investment of 1.5 billion dollars . After that, the value of bitcoin found a peak. At this time there has been no new development in the crypto world that will escalate the demand.”
But Azañedo reminds us of a vital extra point for the context: national regulations. “They have started to restrict the use of cryptocurrencies in different territories. They are beginning to put some buts. In Argentina they have begun to put certain restrictions. In Russia, where it was believed that the government would help to bypass sanctions, too.”
In the neighboring country, the Central Bank of the Argentine Republic (BCRA) prohibited the cryptocurrency purchase and sale service to two banks that announced this movement days ago. According to El Cronista, 74% of Argentines would be willing to buy crypto assets to use them as a method of saving or investment.
Purchase opportunity?
During the news of the crash, the president of El Salvador, Nayib Bukele, announced the purchase of more than 500 extra coins to add more than 2,000 bitcoins to his portfolio. Is the fall a buying opportunity for investors?
In previous drops in the price of bitcoin, the cryptocurrency found support in the range of $28,000 to $30,000 as the lowest point of the decline: after touching them, it rose again. However, Bernos comments that expecting this to be repeated with certainty may be “irresponsible”. “ Cryptocurrencies we know are volatile. We know that we can go down at any time. Could it happen in the last days? We have to see how the market closes in the remainder of the day and how it performs this Tuesday. For now, his support line is around 30 (thousand dollars)”.
“The volatility occurs because the crypto market, although it is in growing adoption, is still small. And as is known, the market goes through cycles and, among them, there is euphoria, a lot of speculation, sometimes everything goes up, everyone wants to buy and it goes up more. When that feeling is exhausted and there is bad news, those who entered crypto to speculate and make easy money sell, and the price collapses, “argues Romero.
“This type of news that impacts crypto behavior is likely to continue, as well as the resilience of cryptocurrencies, for which this would not be their first fall or their first subsequent recovery in value,” he says. “This has been the case since this technology was born. If we look back, the figures lead us to be certain that, by expanding the time segment, we notice how its value always appreciates. For example, despite the current decline, in five years, the value of BTC has increased eighteenfold.”
“If I invest in cryptocurrencies to try to make money tomorrow or in a week, I am playing roulette. Electronic money is a reality and if it is apparently the future, it is not bad or crazy if I invest thinking of one year, two or five years”, concludes Azañedo.