Cryptocurrencies are crashing hard this year. Bitcoin (CRYPTO: BTC) is down about 37% for the year, and many alt-coins are down even more than that. This year, the macroeconomic environment is hammering high-risk assets, including crypto. Interest rates are rising, which is making growth seem less appealing.
In this article, I will explore some reasons why crypto is falling this year and make the case that the correction is just beginning.
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Interest rates are rising
By far the biggest reason why crypto is falling in price this year is because interest rates are rising. There has been a strong correlation between this year’s interest rate hikes and the negative price appreciation in cryptocurrency. The Federal Reserve started hiking interest rates earlier this year. Bitcoin’s price has been falling in the same period. This is the exact same pattern observed in 2018, when the Fed hiked rates and crypto fell.
Obviously, we can’t be 100% positive that the correlation here reveals a causal relationship. However, there are plausible reasons to think that it does. Bitcoin is, like technology stocks, a high-risk asset with high potential returns. Higher interest rates make risk taking less financially desirable. So, investors are likely selling Bitcoin and other cryptos because of high interest rates.
Investor sentiment weakening
Related to the first reason for crypto’s collapse this year is a dimming in investor sentiment. Investors are increasingly losing interest in crypto, both because of higher interest rates and for other reasons.
The cryptos that have specific reasons for poor sentiment apart from macro are getting hit the hardest. Take Ether (CRYPTO: ETH) for example. Down 52% for the year, it is being hit much harder than Bitcoin.
The reason is that the market it facilitates, NFTs, is collapsing. NFTs are “non fungible tokens” that point to other digital assets. People bought them last year hoping to sell them to others for higher prices. Eventually, people stopped buying them, and that diminished sentiment, not only toward NFTs but toward the entire Ethereum project.
Faith in the system being shaken
Last but not least, crypto is crashing because faith in the entire crypto market is being shaken. One of the pillars of cryptocurrency is stablecoins — cryptocurrencies pegged to the U.S. dollar. These coins form a big part of the argument that crypto can be used as money, because their value is stable.
Or at least, their value was stable. Last month, a stablecoin called Terra (CRYPTO: LUNA) collapsed in value when it lost its peg to the dollar. The process by which Terra stopped tracking USD was complex, but basically, there was a coin called Luna that was used as a release valve for Terra transactions, and it collapsed in price. With Luna no longer supporting the price of Terra, both tokens collapsed in value. Many investors lost their entire life savings.
Now, there are people who question whether stablecoins can be relied on as a store of value. Understandably, many of them no longer invest in cryptocurrency at all.
