Bitcoin (BTC) price is struggling to maintain a marginal gain of 0.23% on Oct 20, but in general, cryptocurrency prices are falling across the board and the broader market remains in a strong downward trend. short. Bitcoin price continues to trade below $20,000, a level that many investors believe to be a psychologically significant support and resistance level.
Concerns over the US Federal Reserve’s “lack of progress” in reining in high inflation is the likely reason for the prolonged malaise seen in crypto prices. On October 20, Philadelphia Fed President Patrick Harker suggested that higher interest rates have not been effective in curbing inflation, concluding that “we’re going to keep raising rates for a while.”
Many analysts believe that the Fed’s aggressive rate hikes represent another policy mistake (the first is waiting too long to address rising inflation) and that 2023 will lead to a deep recession.
The print of the consumer price index (CPI) for September showed that consumer prices increased by 0.4%. Compared to a year ago, consumer prices are now 8.2% higher, according to data from the Bureau of Labor Statistics.
In addition to a 0.4% increase in consumer prices, the core CPI increased 0.6% monthly since September and 6.6% in the last 12 months, when food and energy prices are eliminated. .
In short, rising inflation is absolutely the last thing the Federal Reserve wants to see. The Fed’s rate hikes are meant to cool the economy and curb high inflation, so the higher-than-expected report on Oct. 13 is likely to translate into another round of 0.75 basis point hikes in the next few months.
Given the high correlation between the crypto and equity markets, Bitcoin price action tends to follow the direction of the S&P 500 and the Dow, and a series of economic events occurring in mid-October could continue to put pressure on equity prices. cryptocurrencies.
The following dates highlight major economic events that have a history of impacting investor sentiment in the cryptocurrency market:
- October 17 – end of month: third quarter earnings
- October 28: Personal Consumption Expenditures (PCE) Price Index
This week, several major US companies are reporting quarterly earnings, and the mix of results is causing volatility in equity markets. Shares of Tesla (TSLA) fell 6.2% after its third-quarter profit target was missed, with the electric vehicle maker citing production and delivery challenges.
In addition to these upcoming events, the strength of the US dollar and what appears to be a serious escalation in the conflict between Ukraine and Russia continue to weigh on all markets.
Let’s take a deeper look at the three reasons why cryptocurrency prices keep falling in 2022.
Federal Reserve interest rate hikes
Rising interest rates increase the cost of borrowing money for consumers and businesses. This has the side effect of increasing business operating costs, costs of goods and services, production costs, wages, and eventually the cost of just about everything.
High and uncontrollable inflation is the main reason the US Federal Reserve is raising interest rates. And ever since the rate hikes began in March 2022, Bitcoin and the crypto market in general have been in a correction.
When monetary policy or metrics that measure the strength of the economy change, risky assets tend to signal or move before stocks. In 2021, the Fed began signaling its plans to eventually raise interest rates, and the data shows that the price of Bitcoin corrected sharply in December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine. which signaled what lay ahead for the equity markets.
If inflation starts to slow, the health of the economy improves, or the Federal Reserve starts signaling a shift in its current monetary policy, risky assets like Bitcoin and altcoins could once again be the “canaries in the coal mine.” reflecting the return on risk. -In investor sentiment.
The Persistent Threat of Regulation
The cryptocurrency industry and regulators have a long history of not getting along due to various misconceptions or mistrust about the actual use case of digital assets. Without a framework for regulating the crypto sector, different countries and states have a host of conflicting policies on how cryptocurrencies are classified as assets and what precisely constitutes a legal payment system.
The lack of clarity on this matter weighs on growth and innovation within the sector, with many analysts believing that cryptocurrency integration cannot happen until a more universally accepted and understood set of laws is enacted.
Risk assets are heavily affected by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of hostile crypto regulations or, at worst, an outright ban continues to affect crypto prices on an almost monthly basis.
Scams and Ponzis Triggered Liquidations and Repeated Blows to Investor Confidence
Scams, Ponzi schemes, and severe market volatility have also played a significant role in cryptocurrency price declines throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes. Due to the lack of regulation, the youth of the cryptocurrency industry and the market. being relatively small compared to equity markets.
The implosion of Terra’s LUNA and Celsius Network, as well as the misuse of leverage and client funds by Three Arrows Capital (3AC), were responsible for successive blows to asset prices within the crypto market. Bitcoin is currently the largest asset by market cap in the sector, and historically, altcoin prices tend to follow whichever direction the BTC price takes.
As the Terra and LUNA ecosystem collapsed in on itself, the price of Bitcoin corrected sharply due to the multiple sell-offs that occurred within Terra, and investor confidence plummeted.
The same thing happened to an even greater magnitude when Voyager, 3AC and Celsius crashed, wiping out tens of billions in investor funds and protocols.
Related: Here’s What Could Spark A ‘Big BTC Rally’ As Bitcoin Holds On To $19K
What to expect for the rest of 2022 through 2023
The factors that affect price declines within the crypto market are driven by Federal Reserve policy, which means that the Fed’s power to raise, pause, or lower rates will continue to have a direct impact on the price of crypto. Bitcoin, ETH price and altcoin prices.
In the meantime, investor risk appetite is likely to remain muted, and would-be cryptocurrency traders might consider waiting for signs that US inflation has peaked and the Federal Reserve begins to use language. that is indicative of a policy change.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.