The cryptocurrency market crashed this week. There are many reasons why, including increased inflation, interest rate hikes, and geopolitical instability due to the war in Ukraine. Some of the reasons may be temporary, while others will take years to play out. If you’re interested in investing in crypto, you’ve probably wondered why the market is in such a bad state right now.
Prices are affected by macroeconomic factors
One of the main macroeconomic factors affecting the prices of crypto is the Federal Reserve’s (Fed) interest rate. When interest rates increase, it makes it harder for asset managers and banks to raise capital. This has a trickle-down effect, slowing down the economy and reducing inflation.
Inflation is a key macroeconomic indicator, but the price of cryptocurrencies is also affected by other factors. For example, a rising interest rate could encourage investors to deposit money in safe, predictable investments. A high inflation rate could send the crypto market lower as people begin to feel less confident about risky investments.
While it is difficult to predict how these factors will affect the price of cryptocurrencies, there is a general trend. Historically, the prices of Bitcoin and Ethereum are influenced by the state of the economy. The most common macroeconomic variables that affect crypto prices are interest rates, unemployment, and inflation.
Markets are unregulated
Regulators are stepping up their scrutiny of cryptocurrency trading. Binance announced Monday that users in Singapore will no longer be able to trade on its main platform, and China’s Huobi has halted new mainland customers. Gary Gensler, the chairman of the U.S. Securities and Exchange Commission, said at a recent conference that unregulated markets in crypto would hurt consumers. But crypto insiders say that the decentralized nature of crypto will continue to thrive despite regulators’ efforts to control it.
This is a problem for investors, as new cryptos are created all the time. However, most are poorly structured and fail to last long. Additionally, there is no central financial regulator to monitor these digital assets, meaning that investors can lose their entire investment, even if they are unable to access their wallet. In addition, most countries do not recognise cryptocurrencies as legal tender, which means that investors are protected only to the extent that existing laws apply.
Although cryptocurrency is still controversial, it continues to grow in popularity. It is used by criminal organizations and individuals shut out of Western banking systems. But, as the technology continues to improve and becomes more widely available, it is now entering the mainstream. And, as the value of crypto assets grows, institutional investors have started to take notice.
Institutions are under pressure
According to a recent report by JPMorgan, institutional investors are moving away from bitcoin and toward gold. Despite the hype around bitcoin as a store of value, the weakness in the cryptocurrency market could be a part of a larger rotation away from speculative investments. Growth and tech stocks have also been struggling over the past few weeks.
Many factors are driving cryptocurrency prices down, including the global economic climate. Rising interest rates make savings accounts more attractive and may cause investors to free up cash instead of putting it into cryptocurrencies. Government actions also contribute to investor pessimism and push the price of cryptocurrencies down.
Regulators should be more cautious about the growth of cryptocurrencies and consider the risks they pose for traditional financial institutions. For example, crypto exchanges should comply with existing international standards for securities intermediaries, and all jurisdictions should implement them. Also, the international community should focus on making cross-border payments cheaper, faster, and more transparent. The IMF can help countries and regulators with this effort through its Financial Sector Assessment Program.
Short-term holders are more likely to be spent
This is good news for long-term holders of cryptocurrency, but short-term holders have been suffering as of late. It is possible that long-term holders could be spending less than short-term holders, or that they might be at a loss, depending on market conditions. In order to determine this, one has to calculate the “Spent Output Profit Ratio” (STH SOPR), which is a simple calculation based on the difference between the price at which the asset was created and its sold price.