Why is the crypto market down today?

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The price of Bitcoin (BTC) is struggling to recover a modest 0.23% gain on October 20th, but in general crypto prices are falling across the board and the broader market remains in sharp decline. Bitcoin price continues to trade below $20,000, a level that many investors believe to be a psychologically important support and resistance level.

Concern over the United States Federal Reserve’s “lack of progress” on mitigating high inflation is a likely reason for the prolonged malaise seen in crypto prices. On October 20, Philadelphia Federal Reserve Chairman Patrick Harker suggested that higher interest rates had not been effective in curbing inflation, concluding that “we will continue to raise rates for some time.”

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Many analysts believe the Fed’s aggressive rate hikes represent another policy error — waiting too long to address rising inflation first — and that a deep recession will usher in 2023.

The consumer price index (CPI) print for September showed a 0.4% increase in consumer prices. Consumer prices are now up 8.2% compared to a year ago, according to data from the Bureau of Labor Statistics.

In addition to a 0.4% increase in consumer prices, the core CPI rose 0.6% month-on-month since September and 6.6% over the past 12 months, when food and energy prices were removed.

In short, rising inflation is the very last thing the Federal Reserve wants to see. The Fed’s rate hike is meant to cool the economy and put a damper on high inflation, so the higher-than-expected October 13 report is likely to translate into another round of 0.75 basis point hikes in the coming months.

Given the high correlation between the crypto and equity markets, bitcoin’s price action tends to follow the direction of the S&P 500 and the Dow, and several economic events that occurred in mid-October could continue to pressure crypto prices.

The following dates highlight important economic events that have a history of influencing investor sentiment in the crypto market:

  • October 17 – Month end: Third quarter earnings
  • 28 October: Personal Consumption Expenditure (PCE) Price Index

Several major US companies are reporting quarterly earnings this week, and the stock markets are fluctuating with mixed results. Tesla (TSLA) stock fell 6.2% after the electric vehicle maker missed its Q3 earnings target, citing production and distribution challenges.

Apart from these upcoming events, the strengthening of the United States dollar and what appears to be a serious escalation in the conflict between Ukraine and Russia continues to have an impact on all markets.

Let’s take an in-depth look at three reasons why crypto prices keep falling in 2022.

Federal Reserve hikes interest rates

Raising interest rates increases the cost of borrowing money for consumers and businesses. This has the effect of raising the cost of business operating costs, the cost of goods and services, production costs, wages, and, ultimately, the cost of almost everything else.

High, irresistible inflation is the primary reason the United States Federal Reserve raises interest rates. And ever since the rate hike began in March 2022, bitcoin and the broader crypto market have corrected.

When monetary policy or metrics that measure the strength of change in the economy, risk assets precede, or move, equities. In 2021, the Fed finally started indicating its plans to raise interest rates, and data shows that the price of bitcoin is on a bullish correction by December 2021. In a way, bitcoin and ethereum were canaries in the coal mine indicating what would happen next for the equity markets.

If inflation begins to ease, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risk assets such as bitcoin and altcoins will again be “coal mines”, reflecting a return to risk. I may have a canary”. On investor sentiment.

constant threat of regulation

The cryptocurrency industry and regulators have a long history of not coexisting due to various misconceptions or mistrust regarding the actual use of digital assets. Without a working framework for crypto sector regulation, various countries and states have a plethora of conflicting policies regarding how cryptocurrencies are classified as assets and what exactly constitutes a legal payment system.

A lack of clarity on the matter depends on development and innovation within the field, and many analysts believe that cryptocurrencies cannot be mainstreamed until a more universally agreed upon and understood set of laws. Doesn’t go

Risk assets are heavily influenced by investor sentiment, and this trend extends to bitcoin and altcoins. To this day, the threat of unfriendly cryptocurrency regulations or, in the worst case, an outright ban, continues to affect crypto prices on an almost monthly basis.

Scandals and Ponzis triggered liquidations and repeatedly dented investor confidence

Scams, Ponzi schemes and sharp market volatility have also played a significant role in the fall in crypto prices throughout 2022. Bad news and events that compromise market liquidity have catastrophic consequences due to the lack of regulation, the youth of the cryptocurrency industry, and the market. Relatively small compared to equity markets.

The explosion of Terra’s LUNA and Celsius networks, as well as leverage and misuse of client funds by Three Arrows Capital (3AC), were responsible for the frequent blows to asset prices within the crypto market. Bitcoin is currently the largest asset by market capitalization in the region, and historically, altcoin prices tend to follow whichever direction the BTC price goes.

As the Terra and Luna ecosystems themselves collapsed, the multiple liquidations taking place within Terra led to a sharp correction in the price of bitcoin – and investor sentiment plummeted.

The same happened with even greater magnitude when Voyager, 3AC and Celsius collapsed, wiping out tens of billions in investor and protocol funds.

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What to expect for the rest of 2022 to 2023

The factors influencing price drops within the crypto market are governed by Federal Reserve policy, which means that the Fed’s power to raise, stop or lower rates has a direct impact on the price of bitcoin, the price of ETH and altcoin prices. Will keep falling

In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders may consider waiting for signs that US inflation is peaking and the Federal Reserve to begin using language that signals a policy pivot. Is.