Cryptocurrencies currently only know one direction: down. Bitcoin has lost half of its value so far this year. The market is in a sell-off mood, says an analyst.
It hurts just to watch: Cryptocurrencies have to take a beating again and accept heavy price losses. Bitcoin, the most important of them, loses 12 percent to around $23,900, falling below $25,000 for the first time since December 2020. Ethereum is hit even harder, down 17 percent. There is a sell-off mood on the market, said Timo Emden from Emden Research.
The crash is reminiscent of the TerraUSD cryptocurrency crash in May that ravaged the entire crypto market. Bitcoin has now lost almost half its value since the beginning of the year, while Ethereum has even fallen by around two-thirds.
There is one reason above all for the recent deep fall: the very high inflation could force the US Federal Reserve to raise interest rates even faster and more sharply than previously planned. Higher interest rates coupled with high inflation are poison for risky assets like cryptocurrencies.
This is mainly because many people are suddenly running out of money to gamble with cryptocurrencies. The long glut of cheap money from the central banks had driven retail and professional investors into riskier investments, and many of them are now withdrawing.
It is ironic that cryptos will lose value when inflation picks up. Because fans of these projects regularly claim that Bitcoin, for example, offers protection against inflation. After all, there is only a limited amount. In fact, Bitcoin is not “digital gold”. For classification: The price of the precious metal has increased by around 1.5 percent since the beginning of the year.
Cryptocurrencies are more like tech stocks. They are currently among the biggest losers on the stock exchanges. Investors had thrown their (borrowed) money at the companies in the past few years. The consequences: Startups achieved fable ratings in financing rounds, share prices went through the roof. The bet was that the companies would initially burn money – but in the future would make big profits.
Similar arguments are made for many cryptocurrencies. The technology behind it will revolutionize the financial world and other areas, is the promise. Maybe blockchain technology will actually find its general use – but it doesn’t have to be that way.
Not everyone who invested in Bitcoin or Ether may have done so with the conviction that they were putting money into a future technology. You bought bitcoin hoping for quick profits and may have gambled.
This can be seen in the extreme with the so-called Shitcoins. These are crypto projects created with the sole aim of driving the price up. If you get out in time before the crash, you can earn a lot of money – at the expense of others. Some of these shitcoins have been literally pulverized in the past few weeks.
In the course of the corona pandemic, hype had caused steep price gains from November 2020, Bitcoin climbed to around $69,000. Since then it’s been downhill. However, wild price fluctuations are not uncommon in the crypto market. Bitcoin has recovered from every crash so far. It is therefore quite possible that cryptocurrencies will soon rise steeply again.
But it can also be different. The price of cryptocurrencies had risen in recent years mainly because more and more people were buying them. But the current bang coupled with a turnaround in interest rates could mean that investors will be much more cautious here in the future. What’s more, some of them will soon have to sell their crypto holdings to pay bills. This dynamic can cause further price losses.
