Despite strong sentiment that Bitcoin could reach $140,000 AUD ($100,000 USD) in 2022, the cryptocurrency market has begun the year with a crash. At the time of writing, the largest cryptocurrency by market capitalisation is already down almost 40% from its all-time high of almost $100,000 AUD.
With BTC’s price hovering around $58,300 AUD and likely to fall lower, other cryptocurrencies are also taking a hit. Some of the most popular coins such as Ethereum, Solana, Cardano, and XRP have also fallen much harder.
This slump is worrying for many reasons, but the biggest question on everyone’s mind is this: has the long-predicted bear market begun? Are cryptocurrencies facing a market correction after having a fantastic year in 2021?
Most importantly, shall we see a massive upswing when the current downturn finally stops? Many people are fearing a repeat of what happened in 2017 when cryptocurrencies lost 80%-99% of their value.
For now, fear seems to be winning over greed. Here’s why.
5 Reasons Why Crypto Is Crashing
For hardcore hodlers and crypto traders, the current downturn could just be another turn in its usual volatility. However, waves are being made in different parts of the world that could be responsible for the current falling prices.
#1. The US Reserve is Withdrawing Stimulus Measures
In mid-December, officials of the US Federal Reserve held a meeting to address, among other issues, the skyrocketing inflation in the country. The minutes of that meeting were officially released on January 5th, but they had leaked long before that.
One of the strategies proposed was to withdraw COVID-19 stimulus measures implemented in 2020. The Fed was going to pull the plug at some point, but the minutes revealed that they would do so earlier and faster than expected.
Among the measures in question include the rock-bottom interest rates that had been put in place to allow businesses access to capital. By increasing interest rates, the government would stop inflation in its tracks but reduce cash flow in the U.S. economy.
Another measure that was essentially pumping money into the economy is also going to stop. Through stimulus cheques, lending programs, asset buying programs, the government had put more money into circulation to help businesses and families stay afloat.
The Federal Reserve is now saying that the economy is “recovering” and that it’s time to slow down cash injections. The reaction to this news has been the single biggest reason why cryptocurrency prices are taking a hit.
- The news triggered a sell-off: the Fed’s threats to tighten its monetary policy triggered a massive sell-off as investors washed out $1.2 billion AUD of their positions on exchanges.
- Investors are becoming risk-averse: Investors and traders alike are reassessing their risk. The US dollar is gaining strength, so investors are diverting their money to less risky stock markets.
- Reduced liquidity: With reduced stimulus measures, liquidity will shrink as individuals and businesses struggle with high interest rates. In addition, debt and leveraged trades will put a damper on spending.
#2. Overall Downturn in Stocks and Assets
The new monetary measures proposed by the Federal Reserve also affected the stock markets, with the US Nasdaq losing more than 3%. Risky assets such as U.S. equities took the worst hit for the same reasons as the cryptocurrency market.
Bitcoin has been showing an unsettling correlation to the stock market, with a coefficient of 0.44 to the S&P 500. A coefficient of 1 would mean that they were moving in step and vice versa.
Bullish investors thought that BTC and other crypto assets could be used as a hedge against inflation. For example, Bitcoin’s limited supply of 21 million BTC helps drive up its value and stave off inflation.
However, BTC and the crypto market in general hasn’t held up well during stock market crashes. With increasing predictions of a stock market correction or crash sometime in the near future, investors aren’t confident enough to buy crypto as a safe-haven investment.
#3. The Omicron COVID-19 Variant
The coronavirus Omicron variant has also played a big role in reducing investor interest. We had all expected a “new normal” by this time, but the evolving virus has put things on hold.
Following news of the variant’s extreme transmission capability, fears over travel restrictions, back-to-work restrictions, and lockdowns are causing sell-offs and reduced spending. You might remember the 2020 crash that brought BTC under $5,000 USD due to unprecedented lockdown measures.
In addition to a feeling of déjà vu, the variant is also causing real problems elsewhere. Supply chain issues are still driving manufacturing costs high and outages in some sectors.
This general sense of uncertainty is resulting in the liquidation of positions among retail investors.
#4. Internet Shut Down in Kazakhstan
Kazakhstan has been rocked by violent protests since the beginning of the year following rising fuel costs. The Kazakh government decided to stop subsidising LPG, which many people were using to fuel their vehicles as it is cheaper than petrol.
The government responded to the protests by shutting down the internet on Wednesday the 5th of January. The result was a collapse of Bitcoin mining hashrates and a loss of 12% of bitcoin’s global computational power.
Few people could have guessed how important the country was in the worldwide mining sector. After China banned BTC mining, many operations fled to Kazakhstan to take advantage of its cheap coal-powered electricity.
By the end of 2021, the country had become the second-largest player in the bitcoin mining market after the US.
The situation in Kazakhstan is likely to continue for some time. The president, Kassym-Jomart Tokayev, fired his cabinet and declared a state of emergency, even giving a shoot-to-kill order to quell the uprising.
Even if peace is restored soon, the country’s reliance on dirty coal plants is going to be bad for BTC’s long-term sustainability as it seeks to go green.
China’s bans on cryptocurrency are no longer news in the crypto world. What’s causing ripples, though, is the country’s bubbling real estate market.
Valued at almost $70 trillion AUD, the Chinese real estate market is the most important commercial sector in the world. The Evergrande situation showed just how the Chinese real estate market can drive fear and uncertainty in global markets despite intervention by the Chinese government.
The situation has now been brought under control and the debt crisis has abated, but Beijing has also been seeking increased oversight of other big industries such as tech.
Investors generally dislike oversight, but having the government putting the blinds on market movements causes unnecessary anxiety and reduced investments. More importantly, foreign investments are being put on watch by Beijing. All these reactions are causing global ripples that are being felt in the crypto world.
What Will the Rest of the Year Look Like? 5 Predictions for 2022
Despite the prevailing sense of uncertainty, the current crypto market crash has all the signs of being a temporary one. For starters, the U.S. Federal Reserve’s hawkish measures will become a problem if the economy fails to pick up.
If inflation, unemployment, and debt become manageable, the market will become stronger and more predictable.
Secondly, big dips like this are nothing to be worried about. Unless BTC breaks its resistance and falls below $56,000 AUD, we can expect it to keep going strong and end the year on a high note.
The past year started even worse, but it ended up being an outstanding one as most cryptos saw massive gains. BTC itself gained 68.56% of its original value even disregarding its all-time high. Most other cryptocurrencies such as Ethereum, BNB, Solana, Avalanche, and many others saw gains of hundreds and thousands of points.
Goldman Sachs is still very bullish on BTC, predicting that it will reach $140,000 AUD if it continues to take market share from gold.
More importantly, the outlook on the entire cryptocurrency market is still very bullish. The explosion of decentralised finance, NFTs, gaming, and other on-chain projects is going to sustain cryptocurrency and drive prices.
While interest in “meme coins” such as Shiba Inu could fall, solid projects such as exchanges, gaming platforms, among others are making real money for their investors. So, even without having to invest directly in crypto, there are still many other ways to make money.
Hold On to Your Strategy
With that being said, what do you do during this crash? In most cases, doing nothing is good enough. These volatile drops and jumps are to be expected. After some inactivity during the holiday season, some action is going to be seen in the first quarter of the year.
The important thing is to stick to your trading strategy no matter what. Whether you’re a hodler or even want to buy the dip to increase your portfolio, it is important to not let sentiment drive your decisions.
There have been plenty of death tolls for BTC and the crypto market to date and it always manages to come back stronger than ever. Right now, there’s no reason why this year should be different.