Status: 05/10/2022 1:39 p.m
The crypto market, led by the best-known digital currency Bitcoin, has been on a downward slide since the end of March. Bitcoin recently fell below $30,000. What are the reasons?
For the first time since July 2021, Bitcoin temporarily slipped below the $30,000 mark last night. The other digital assets such as Ether, XRP or Dogecoin followed him down. As recently as November, the oldest and best-known cryptocurrency was still trading at almost $69,000.
How dramatic the recent decline is can also be seen when looking at the market capitalization of all currently around 19,300 crypto assets. According to the Coinmarketcap portal, this has just fallen below the $1.5 trillion mark. That’s just half of the record high of nearly $3 trillion reached last November.
turnaround in interest rates
Why are innovative digital stocks so sidelined right now? A key connection becomes apparent when looking at interest rate developments. Just when the US Federal Reserve increased the key interest rate for the first time since the end of 2018 at the end of March, the cryptocurrencies began to plummet. Conversely, the zero interest rate regime since March 2020 has obviously done the prices of the digital currencies good.
The turnaround in interest rates by a number of central banks around the world is also considered to be the greatest burden for young investments. Many of them are now facing a determined tightening of monetary policy for the first time. Rising interest rates are causing problems for assets that, like cryptocurrencies, do not generate regular income, while forms of investment with interest are becoming more attractive again.
Rising risk aversion
In addition, experts identify a growing risk aversion among investors, which is fueled not only by fear of interest rates but also by the uncertain progress of the Ukraine war. Numerous Institutional investors treated cryptocurrencies like tech stocks, says crypto analyst Timo Emden of Emden Research.
“Against the background of further rising capital market yields and a more restrictive central bank policy, investors’ risk appetite seems limited,” explains Chief Investment Strategist Ulrich Stephan from Deutsche Bank. “Highly speculative and volatile investments such as cryptocurrencies are thrown out of the portfolios in such an environment.” A trend reversal cannot currently be identified.
Government regulation remains a pillar
A lot has happened on the crypto market since bitcoin’s record high last November. After El Salvador, the Central African Republic is the second country to allow Bitcoin as legal tender. Panama is working on allowing crypto assets, not just cryptocurrencies, as a normal means of payment.
At the same time, the opportunities for private investors to participate in the crypto market have also increased in recent months due to the market entry of several startups.
Difficult interaction with monetary policy
Meanwhile, a fundamental question for the crypto markets remains unanswered: How well do crypto currencies fit into the monetary policy concepts of the central banks? Their main task remains the stability of the currency, including the regulation of the money supply.
Another means of payment in addition to the national currency that is not controlled by monetary policy is therefore fundamentally not in the interests of the central banks. In this respect, there is always the danger of excessive regulation, including a trade ban, like in China, like the sword of Damocles over the crypto markets.