The bankruptcy of one of the most famous crypto exchanges in the world, FTX, whose capitalization was estimated at $32 billion in 2022, accelerated the fall in quotes on the crypto market. But the true reasons for the ongoing crypto winter and bearish sentiment are more numerous, according to experts.
JPMorgan forecast
Analysts at the American investment bank JPMorgan suggested that bitcoin could lose another 25% of its value. Experts believe that the bankruptcy of FTX is just one of the catalysts. Reasons include the US Federal Reserve’s rate hike and the balance sheet cuts the Federal Reserve has resorted to since June, pulling money out of financial markets in a desperate attempt to cool the economy and tame inflation. Such monetary policy negatively affected not only the rates of most popular cryptocurrencies, but also the stock market, including blue-chip shares of American companies.
Falling after stocks
The fact that the dynamics of the bitcoin rate correlates with the rate of the S&P 500 index, which includes the 500 largest US public companies by capitalization, was also stated by Bloomberg analysts. In July, they noted a decline in the 40-day correlation coefficient of the two financial assets. Throughout 2022, the S&P 500 index is in a protracted downtrend, as is bitcoin. For comparison, in July the value of the correlation coefficient was 0.5 (in the range from -1 to 1), while at the moment it fluctuates around 0. In general, the correlation is still
more often positivealthough it declined after the FTX-related events.
BTC rate
If you look at the world’s largest cryptocurrency by capitalization, the situation has clearly worsened in recent months. In November 2021, the price of bitcoin was at an all-time high, reaching around $69,000. Over the past 12 months, the rate has fallen by more than 75% from its peak values.
During the pandemic, cryptocurrencies were on a roll largely due to the actions of the Fed: US officials kept rates near zero, and there was a constant stimulation of bank balance sheets through the purchase of bonds and other assets from them.
However, with the advent of 2022, things have changed. The inflationary boom led to higher rates and the evaporation of capital. According to Wall Street analysts, this was a bad sign for crypto assets, as they soaked up all this excess money like a sponge. The opinion was confirmed in practice: investors began to withdraw money from BTC and many altcoins.
From the point of view of JP Morgan analysts, the Fed leaves room for maneuver next year. According to banking analysts, the slowdown in the growth of the amount of money around the world will continue, but not in the US.
The decrease in injections from the institutional side has led to the fact that investors have lost their appetite for risk. Plus, another reason for the fall in the value of cryptocurrencies. This is not to say that this only affected bitcoin. The cost of Ethereum, Solana, Cardano and others decreased after the first cryptocurrency.
Fed policy
The actions of the Federal Reserve caused a shock not only in cryptocurrencies, but also in the fintech sector. Meta (former Facebook) stock quotes fell in price from September 2021 to November 2022 by 77%, Microsoft shares fell by 39% from November 2021 to November 2022, and Amazon shares fell by 54% from November 2021 to November 2022.
The reaction of the markets is quite understandable. For a long period of time (more than a decade, to be exact), the Fed was pumping money into the markets like water from a hose, and suddenly shut off the supply abruptly. All this has led to the fact that high-risk and fast-growing sectors of the economy have ceased to be of interest to the mass of investors.
Another victim of the Fed’s policy was the real estate market. It was the Federal Reserve that turned out to be the biggest buyer of mortgage debt during the pandemic. As a result, mortgage-backed securities sold off and US mortgage rates rose sharply. Now they are about 7%, which is 4% more than in this period of 2021. As a result, purchasing power has declined significantly. According to the National Association of Realtors, US home sales have been falling for the eighth month. This is the longest recession in the US real estate market since 2007.
China: “zero covid” and a ban on crypto assets
Markets reacted positively to the easing of anti-coronavirus restrictions in China. This was reflected both in the yuan (since the beginning of November, the currency has gained more than 7%), and in the growth of shares traded on the Hong Kong Stock Exchange. However, the Chinese authorities have not yet brought the real estate market out of the crisis (it provides almost 30% of the country’s GDP), which collapsed in 2021. Yes, there is a plan to bring the industry out of the crisis, but investors perceive all this news with caution. China is still under the influence of a number of economic problems: economic growth has stalled, youth unemployment is at record levels.
The IMF revised its forecast for China’s economic growth. In 2022, it will be only 3.2%. This is a noticeable decrease compared to 2021, when the figure reached 8.1%. The current one was the worst for the country in 46 years. If you do not take into account 2020, when economic growth was halted by the outbreak of the coronavirus.
In short, the economic environment in China is not conducive to risky investment. Since the fall of 2021, there has been a ban on the circulation of cryptocurrency by the Chinese financial regulator. According to the Cambridge Center for Alternative Finance, Chinese officials failed to completely destroy the cryptocurrency market in the country and stop mining. At the beginning of 2022, the share of Chinese miners in the global hashrate exceeded 21%. On the other hand, in 2019, Chinese crypto enthusiasts accounted for about 75% of the total BTC hashrate. Thus, the fall in the bitcoin rate can also be viewed through the prism of China’s financial policy, the introduction of administrative barriers and a decrease in the growth of the Chinese economy.
Halving cycles
A significant role in the pricing of bitcoin is played by limited emission and a systematic reduction in the reward for a new block every four years. The last halving took place in 2020 and the current reward is 6.25 BTC. The next halving in 2024 should bring the block reward down to 3,125 BTC. At the same time, according to the data
Buy Bitcoin Worldwide as of November 2022, more than 91% of the total BTC has been mined.
The halving pricing model explains the “high cyclicality” in the cryptocurrency market, Bitpay experts say. Interestingly, a historically sharp rise in the price of bitcoin is almost always accompanied by an equally extreme fall. For example, during 2013, BTC rose from $14 to $1,100. But already starting from the second half of December, a bearish trend was outlined, and by January 2015, the cost of bitcoin was approximately $180.
A similar situation was observed during the crypto winter of 2017, when the first cryptocurrency rose to $20,000 in December. Considering that the asset was worth approximately $960 at the beginning of the year, it can be argued that the price has increased by 20 times. But then, in December 2018, BTC traded around the $3,200 level. It can be assumed that in the intervals between halvings, the rate tends to new historical highs, followed by protracted corrections and crypto winters.
Conclusion
The current fall in the price of bitcoin can be seen as a protracted correction after reaching another all-time high of $69,000, a year and a half after the next halving. And it can be associated with a combination of reasons, including, on the one hand, a correction within the current halving cycle. On the other hand, there are such events as the bankruptcy of FTX, the negative news background regarding Terra and Luna, the monetary policy of the US Federal Reserve, the consequences of covid restrictions, the ban on mining and circulation of cryptocurrencies by the Chinese regulator. All of them definitely reinforce the downtrend in the crypto market.
Source: Bits
I am an experienced journalist, writer, and editor with a passion for finance and business news. I have been working in the journalism field for over 6 years, covering a variety of topics from finance to technology. As an author at World Stock Market, I specialize in finance business-related topics.
