Crypto prices keep falling, but why? This year’s market crash has turned most winning portfolios into net losers, and new investors are probably losing hope in Bitcoin (BTC).
Investors know that cryptocurrencies exhibit higher than average volatility, but this year’s drawdown has been extreme. After hitting a stratospheric all-time high at $69,400, Bitcoin price crumbled over the next 11 months to an unexpected yearly low at $17,600.
That’s a nearly 75% drawdown in value.
Ether (ETH), the largest altcoin by market capitalization, also saw an 82% correction as its price tumbled from $4,800 to $900 in seven months.
Years of historical data show that drawdowns in the 55%–85% range are the norm after parabolic bull market rallies, but the factors weighing on crypto prices today differ from those that triggered sell-offs in the past.
At the moment, investor sentiment remains soft as investors avoid risk and wait to see whether the Federal Reserve’s current monetary policy will alleviate persistently high inflation in the United States. On Sept. 21, Fed Chair Jerome Powell announced a 0.75% interest rate hike and hinted that similar-size hikes would occur until inflation drops closer to the central bank’s 2% target.
Let’s take a deeper look at three reasons why crypto prices keep falling in 2022.
Federal Reserve interest rate hikes
Raising interest rates increases the cost of borrowing money for consumers and businesses. This has the knock-on effect of raising business operational costs, the costs of goods and services, production costs, wages, and eventually, the cost of nearly everything.
High, unsupressable inflation is the primary reason the United States Federal Reserve is raising interest rates. And since rate hikes began in March 2022, Bitcoin and the broader crypto market have been in a correction.
When monetary policy or metrics that measure the strength of the economy shift, risk assets tend to signal, or move, earlier than equities. In 2021, the Fed started signaling its plans to raise interest rates eventually, and data shows Bitcoin price sharply correcting by December 2021. In a way,…