Introduction
Cryptocurrencies are known for their volatile nature. The recent sell-off in the cryptocurrency market has had a huge impact on investors. It wiped around 1 trillion dollars in the market cap from the industry. Bitcoins, ethereum and other famous cryptocurrencies dominated the trading market in 2021. But towards the end of December, there was a slight variation in the prices of cryptocurrency mammoths. Cryptocurrency prices started to fall, creating a shockwave among the investors.
Despite not being backed up with any solid assets, cryptocurrencies managed to gain popularity and became an investment magnet attracting investment in billions. But this price drop has started questioning the basics. In this article, we will discuss the main reason behind this price fall.
Why are cryptocurrency prices dropping?
As per experts, cryptocurrencies are based on the sentiments of the people. One of the big reasons why cryptocurrency prices drop is the emergence of the covid omicron variant.Guessing the pandemic situation is not possible, no one knows how the spread will affect the people. Globally, countries have initiated partial lockdown or a complete lockdown depending on the situation.
The spread of the covid omicron variant has shifted the investor’s interest from taking any risks. As a result, investors have stopped investing in cryptocurrencies as it is riskier in a vestment.
” with omicron coming along and the US economy stalling a bit, a lot of macro funds that use Bitcoin as this Pro-cyclic inflation hedge has decided to take profit throughout December.”
Brian Kelly-CEO and founder of digital currency investment firm said to CNBC.
Another reason is the concern of investors about energy usage in crypto mining. Bitcoin mining is perceived as a negative aspect since it consumes a lot of energy. Some experts believe that this should not be an issue as the energy is put to proper use by creating massive value. In December, cryptocurrencies mining experienced a major decline than assets. The perception of Bitcoins and stocks closely related in the investor’s mind are changing.
The sudden decrease in the price of cryptocurrencies has been very harsh on retail investors; on the contrary, institutional investors have increased their stake in crypto. It was confirmed when Microstrategy purchased 1914 Bitcoins worth around 94 million dollars on December 30 2021 despite going down by 21%.
Bitcoin price drop
As of January 24th, Bitcoin, one of the world’s most famous Cryptocurrencies, dropped more than 20% and started trading as low as $33000 before rebounding.But why is the bitcoin price dropping?
The main reason for this particular price drop is a shift occurring in the market. The investors are shifting from high-risk to low-risk investments.Bitcoins are risky investments. They have a considerable amount of volatility when compared to other investment vehicles.
Another reason is the federal reserve’s idea to increase the interest rates. This step is crucial to combat inflation levels in the US. The official information of the federal reserve increasing its interest rate is not yet clear. However, as per the experts, the increases in the interest rate will have a high impact on the short-term market interest. The short-term market interest will raise-high by a percentage this year.
With the increasing interest rates, the liquidity of Bitcoins may dry up due to the lower demands for more growth companies, and it includes risk assets like cryptocurrencies and Bitcoins. There is no clear-cut information on how this will change.
” We have no historical precedent for how Bitcoin and other cryptos might act if we enter a sustained period when Central Bank actively drinks liquidity; those tend to be difficult times for investors and despair assets tend to underperform safer once.”- Steve Sosnick, an interactive brokers chief strategist
Bitcoins are highly volatile like other cryptocurrencies, and the situation is not something new. Since 2009 it is the eigth time Bitcoin has experienced around a 50% drop from the all-time high. Even during July 2021, Bitcoin fell below $30000, it happened due to China’s crackdown of digital currencies mining. As per the experts people who are unable to bear this drastic fall should not invest in Bitcoin
Ethereum price drop
Ethereum is the second-largest Cryptocurrency in the market. It witnessed a drastic fall of up to 3.7 % and started trading at 3000 dollars. On Jan 10th, Ether traded below 3000 dollars. The removal of risk Laden assets from investor portfolios denotes the beginning of a new cycle.
check this video by Travis Martin– who owns a youtube channel called ” Trade confident” that is completely dedicated to crypto trading. In this video Travis Martin clearly explains why the price of etherium will drop along with his prediction for this weekend. Travis clearly demonstrates the drop in price accurately using a live trading screen and his investments, which is more authentic.
Surging inflation is one of the main reasons for the drop in ethereum and other Cryptocurrency prices. As per market experts, the increasing usage of altcoins in cryptocurrency exchanges is another reason for the Ethereum price drop. The spike in ethereum inflow to other exchanges like coinbase has drastically increased the selling pressure on altcoin.
Another reason for the Ethereum price drop is the increased selling pressure due to opensea and NFT transactions. Nearly 21000 Ethereum’s were transferred directly from Openseas wallet to coinbase. An additional 35300 ethereums are paid as royalties for NFT’s from the opensea. This inflow increases the selling pressure triggering a price drop of ethereum.
As per experts, the only Ichimoku condition keeping afloat is the Chikou Span that remains above the candlesticks. However, some experts suggest that this current sell-off may reverse.As advice, it is wise to ignore the ups and downs.
There is no definite answer whether Ethereum continues to grow or provide exponential growth. The truth is there is no guarantee the value will increase but be on the safer side Investment experts advise investing only 5% or less than 5% in Cryptocurrency.
Dogecoin price drop
Dogecoin is a crypto success. It went from being a joke to A 90 billion dollar digital asset. Like its competitors, Dogecoin also faced a 28% drop in its price. It started to trade at $ 0.1228.Also, the stock market has got the jitters alongside cryptocurrencies. Federal reserve interest rates and a ban proposal of cryptocurrencies by the Russian Central Bank has sparked the sell-off.
With over 12 percent of the population in Russia going crypto, it is called the crypto capital of the world. The ban proposal in the crypto capital had a major impact on the prices of Dogecoin.Despite facing loss, Dogecoin has a notable increase in price after Elon Musk tweeted, It reduced losses for investors. Elon Musk’s tweet stated that he would readily eat a happy meal on TV if fast-food giant McDonald’s started accepting Dogecoin.
Elon Musk’s love for Dogecoin is very well known globally. He is also called a Dogefather by some netizens. His conscious effort to expand dogecoin acceptance beyond Tesla merchandise is also pretty evident. This support makes Dogecoin one of the most potent crypto coins of 2022.
Cryptocurrency in 2022
The crypto market, after the drop in the price, is awaiting a clear update from the US federal reserve, by gaining clarity in the interest rate hike, one can predict the future of Cryptocurrency. The cryptocurrency market is trying to reach a stable position after the price drop. The outcome of the US federal reserve dominates this stance.
The crypto market cap globally has gained more than 2% to the 1.67 trillion dollar mark. On the global front, the executive board of the international monetary fund has suggested discontinuing Bitcoin used as a legal tender in El Salvador due to the liabilities and financial risk.It came as an outcome of a discussion between El Salvador and the international monetary fund for a loan of 1.3 billion dollars.
Due to higher volatility in the market, Cryptocurrency exchanges have recorded higher volumes, especially in the Indian market. Most of the risky coins are liquidated by traders and investors to balance the portfolio. The investor’s focus is shifting towards stable coins.
Another major update to look around in the cryptocurrency sector is streamlining industries. The blockchain-based service network BSN infrastructure project in China has released its tokens for non-fungible tokens.As per some of the experts, Crypto winters have already started. It refers to the break in the digital currency market’s history.
It’s during crypto winters that the best entrepreneurs build the better companies. This is the time again to focus on solving real problems vs. pumping tokens.
— David Marcus – dmarcus.eth (@davidmarcus) January 24, 2022
But as of now, the greatest fear of traders is the drastic drain of liquidity in the market due to interest rates hiked and other monetary reforms implemented by the federal reserve may drastically.
Conclusion
According to experts, the fall in Cryptocurrency is not specific to any industries on a broader scale, and other financial markets across the world are facing the heat. Since crypto still pertains to the stock market, any changes in the stock market will impact the crypto market.
Microsoft purchasing Activision, a leading game developer closely associated with metaverse, shows that the crypto market is still strong. Another notable aspect is the decision of Instagram to use NFT’S show that the cryptocurrency market will not fade away anytime soon.
Some market experts believe that the cryptocurrency market will not go lower than the present level, and it may also be a good buying opportunity. Most of the fundamentals are making profits initself is a major sign that it is an opportunity and not an end. As per the history of cryptocurrency it is not the first time it is facing a large fall, and everytime a fall occured it regained its way back to the top.
However, it is crucial to make a well-informed decision. As per investment experts, it is safe to invest only 5% or less than that in Cryptocurrency. Also, the investment largely relies on the investor’s risk appetite, it is always recommended not to cross that threshold. Some investment experts also suggest investing in a diversified manner to reduce losses.