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Highlights
- The Fed may hike rates soon, and investors may be trimming their bets on riskier assets
- Russia may become another major economy to ban cryptos if its central bank’s proposals are accepted
- A few metaverse tokens have defied the crash and have risen over the past 24 hours
The crypto market has underperformed so far in 2022. The past 24 hours saw Bitcoin, Ether, Binance Coin, Cardano, Dogecoin and many other large market cap cryptos losing nearly 8 per cent.
What has happened of late in the cryptocurrency market? Why are cryptos down? Will cryptos revive soon? Hereunder are the factors that are to blame for the crypto crash this year.
1. Fed’s rate hike hints
In mid-December 2021, the Fed dropped a strong hint of what’s coming in 2022. The Federal Open Market Committee (FOMC) members unanimously expected multiple rate hikes in 2022. The statement acknowledged a gap in demand and supply, which it said is contributing to ‘elevated levels’ of inflation.
It is estimated that at least three rate hikes would come in 2022, with a few analysts expecting four. The market has turned cautious toward riskier assets including cryptocurrencies. The US Treasury yield has also gone up lately, indicating a move of investors toward safe havens.
2. Stock market correction
The S&P 500 Index is down almost 6 per cent on a year-to-date (YTD) basis.
The heart of the global stock market, S&P 500 returned nearly 27 per cent in 2021. A few analysts are also predicting a wider correction in the global stock market in the upcoming days. One of the drivers behind this is Fed’s hawkish policy stance. Other indices including the S&P/TSX Composite Index of Canada’s stock market are also subdued.
Also read: Tech stocks in 2022: Will they create wealth for investors?
3. Russia’s proposed ban
The crackdown on Bitcoin and other private cryptocurrencies may continue in 2022. Russia may go the China way. The central bank of Russia has proposed a complete ban on multiple aspects of cryptos. It has cited a risk that faces the Russian economy on account of citizens dealing in highly volatile assets.
Russia is said to be one of the top mining regions for Bitcoin. The central bank is concerned that mining is consuming too much energy. A prohibition on mining and trading in Russia may deal a severe blow to the crypto market stakeholders.
Besides, crypto exchanges may be barred from any operations in the country.
4. Redistribution of funds
Of late, newer sub-categories within the crypto market seem to have taken a lead over major assets like Bitcoin.
Data provided by CoinMarketCap.com
Microsoft’s recent acquisition of a gaming company has shone the spotlight on metaverse. Another tech giant Facebook also entered the virtual reality world in 2021. Amid a sharp fall in most top crypto assets over the past 24 hours, some metaverse tokens like Sin City (SIN) and Verasity (VRA) have gained.
Investors may be redistributing their dollars across a variety of assets that include altcoins and NFTs.
Also read: Why are NFTs valuable?
5. Profit booking
Crypto assets are profitable only when the investor purchases them and then exits the market at the right time.
Bitcoin saw major resistance after it reached US$68,000 in November 2021. Seasoned investors would have noticed the reluctance of the crypto to rise any further, and a few may have booked profit. Besides, the retail investors rush in cryptos may have declined, which has brought demand forces under pressure, thereby a fall in prices.
Bottom line
The Fed’s hawkish stance, Russia’s likely ban, and a slowdown in new retail investors entering cryptos are some of the factors behind the ongoing slide in cryptos.
