Bitcoin and cryptocurrency traders, in general, have woken to red lines throughout (opens in new tab), as Bitcoin has followed the general trading markets in its significant 9.3% fall to three-week lows of $21,400. It marks the sharpest decline over two months as expectations of a hawkish fed and more aggressive moves against inflation have reduced investor confidence.
Markets are swift to respond to changes in monetary policy. The tentative recovery in stocks and the crypto market following the May-June crash stood on the market’s confidence that they’d already priced-in interest rate hikes throughout 2022. Allied with expectations that inflation would be curbed soon enough that 2023 might see a reversal in the hiked rates – with a controlled return to normalcy – primed the stage for a gradual recovery.
Between May 5th and June 19th, Bitcoin dropped by over 50% (opens in new tab), from a high of $39,676 to a bottom of $18,958 by June 19th. In the meantime, Bitcoin has (more or less) steadily gained ground, hovering around the $24,000 mark since the end of July.
That recovery is now in shambles.
According to data from Coinglass, today’s downturn led to Bitcoin traders losing an estimated $600 million in liquidations in the last 24 hours (opens in new tab). Liquidation is one process through which traders’ positions are closed. It usually happens when they overcommit their funds, borrowing assets against their Bitcoin. The issue occurs when Bitcoin’s price falls more than the traders foresaw, which can mean that they no longer have the funds to guarantee their positions, thus triggering a liquidation event where their guarantee (Bitcoin) is taken to pay their debt.
Expectations of the Fed increasing interest rates more than previously thought – and increased risks of a continued quantitative tightening (opens in new tab) through 2023 – means that The Fear and Greed Index for Bitcoin now stands at 33 points (opens in new tab) – 8 less than the 42 of the previous week. Lower numbers indicate increased fear, while higher numbers correlate to increased greed (and more aggressive investments).
Bitcoin may be the leading currency by market cap, but the cryptocurrency market is much bigger than it. The number-two cryptocurrency, Ethereum, has been riding a wave of excitement and increased valuation due to the impending conclusion of its next upgrade, a process dubbed The Merge, which fell by 9%.
Other promising cryptocurrencies such as Algorand fell as much as 10.5%, while less-known altcoins such as Filecoin’s (opens in new tab) FIL token led the fall by an eye-opening 18.5%. Flow, the cryptocurrency recently partnered with tech giant Meta (opens in new tab), is down by 17%. Ethereum Classic’s ETC token considered an alternative to Ethereum that might still enable GPU mining for a second lease of life, fell 15%.
How and when the market will readjust is anyone’s guess and primarily depends on investor sentiment and due diligence. However, with inflation still running free and doubts being cast on how changes in monetary policy are contributing to lowering inflation rates (opens in new tab), it pays to be cautious, never investing more than one can lose.