Bitcoin (CRYPTO:BTC) took a substantial dip last week, falling 4.7% in five days. The entire cryptocurrency market suffered the same fate, with some alt-coins falling even more than Bitcoin. There wasn’t much news about cryptocurrency that might have influenced the selloff. The biggest crypto news story last week — the nation of Tonga adopting BTC as legal tender — was actually a positive one. In light of this, it is hard to say what crypto traders are thinking right now.
In this article, I will explore some possible reasons why Bitcoin is falling and try to gauge whether a massive 2018-style crash is imminent.
Federal Reserve raising interest rates
When you look at Bitcoin’s moves in 2022, there is one factor you need to consider above all others: institutional adoption.
These days, Bitcoin counts many banks, asset managers, and payment companies among its holders. Gone are the days when BTC was the purview of a tiny class of coders and hobbyists. Today it is held by investors who make their buying and selling decisions based on conventional financial analysis.
That fact could be part of why Bitcoin is falling in 2022. For an institutional investor, higher interest rates make risky assets like Bitcoin less appealing. The higher treasury yields go, the less reason there is to hold risky assets. If treasury yields go higher than the inflation rate, you can get a positive risk-free return. That makes assuming risk less necessary in high-rate environments.
This fact wouldn’t have mattered back in the days when crypto was mostly held by hobbyists. Today, it might matter, as a lot of Bitcoin is held by institutions that factor these kinds of things into their decision making.
The story of 2018
In 2018, Bitcoin fell 80% from the top to the bottom. There were many reasons given for this collapse in value at the time:
- Speculative excess leading up to the crash
- Claims of market manipulation
- Rising interest rates
The last of these factors is consistent with the thesis I outlined above. In 2018, the Federal Reserve raised U.S. interest rates by 25 basis points four quarters in a row. By the end of the rate-hiking binge, the Federal Funds Rate went as high as 2.5%.
It’s possible that the Fed’s 2018 rate-hiking spree influence Bitcoin’s price moves that year. We can never be 100% sure why investors bought or sold when they did, but the negative correlation between BTC and interest rates in 2018 is worth thinking about. Perhaps even four years ago, investors were already factoring interest rates into their crypto trading decisions. If that’s the case, then we could expect crypto, including Bitcoin, to crash in 2022.
Foolish takeaway
2022 is shaping up to be a down year for Bitcoin. It’s still possible for BTC to recover from its losses, but the Federal Reserve seems quite intent on continuing its rate hiking. If investors are considering a broad investment universe that includes stocks, bonds, and crypto together, they’re probably thinking that crypto is now less appealing compared to other asset classes. We don’t know for sure that this fact will lead to a 2018-style meltdown. But it could cause some turbulence.
