Why Is Bitcoin Down Today? – Forbes Advisor

That’s a decent downside for the original crypto. Bitcoin (BTC) fell below the psychological threshold of $20,000 yesterday before plunging to less than $19,000 as US markets opened this morning.

The sale followed a strong service report from the Institute for Supply Management. The better-than-expected report renewed investors’ fears that the Federal Reserve will raise interest rates at its next meeting on 20-21. September.

CME’s FedWatch tool predicts an 80% chance of a 75 basis point (bps) increase and a 20% chance of a 50bps rise.

Higher interest rates will strengthen the US dollar. But fears of a stronger dollar quickly sent growth stocks such as technology stocks tumbling. The Nasdaq ended down more than 1% in Tuesday’s trading.

The next morning, other risk assets such as cryptocurrency quickly followed.

As of this writing, BTC is down more than 5% in the last five days. The original crypto is now at its lowest price point since June 18 and is once again flirting with the lowest prices of almost $17,000.

Ethereum, the leading altcoin, has fallen more than 2% in the past five days. Ethereum has experienced even more volatility than Bitcoin recently, with Ethereum’s merger starting on Tuesday morning when the blockchain implemented the Bellatrix upgrade.

Other cryptos have also felt the pressure. The total cryptocurrency market capitalization is below $1 trillion again, far from its $3 trillion in November 2021.

Bitcoin bottom

Before Bitcoin hit some snags last month, the native crypto had traded at nearly $25,000 on August 14, a significant improvement from June’s prices when Bitcoin bottomed out.

For those who need a refresher: Bitcoin bottomed out at its 52-week low of $17,708 on June 18. The drop followed news of several crypto companies facing a liquidity crisis.

Several days before Bitcoin’s bottom, crypto lender Celsius halted customer withdrawals due to “extreme market conditions.” Celsius has kept customer withdrawals and transfers frozen since June 13. The crypto firm filed for Chapter 11 bankruptcy protection on July 13 after a month of turmoil.

In addition to the pile of insolvencies of crypto firms, it was reported around 16-17 June that Three Arrows Capital (3AC), a Singapore-based crypto hedge fund, was insolvent.

On June 27, Three Arrows Capital (3AC) defaulted on a loan from Voyager Digital; The loan was worth around $350 million in crypto assets and consisted of USD Coin (USDC) and approximately 15,250 BTC. For those who need the backstory, 3AC was a major supporter of TerraUSD/LUNA, the epicenter of May’s stablecoin meltdown.

The series of liquidations from cryptolenders such as BlockFi, Voyager and Celsius spelled disaster for 3AC, sending the firm into bankruptcy.

Bitcoin prices are now down more than 60% year-to-date, trading well from their all-time highs of around $69,000 in November 2021. Experts also say BTC is no longer seen as an inflation hedge, trading in lockstep step with stocks, which are also in recessions.

Celsius, a decentralized finance (DeFi) platform and one of the largest crypto lenders was a major source of negative Bitcoin market sentiment in mid-June.

With up to 1.7 million customers, Celsius gained a cult following in the crypto world by announcing that users could earn an annual percentage return (APY) of up to 18% by depositing their crypto holdings on the company’s platform.

The company takes crypto deposits and lends them to other investors and financial institutions in a process analogous to conventional bank loans. Users earn returns from the revenue Celsius generates from crypto borrowers.

The company had $11.8 billion in assets under management (AUM) as of May 17, down from more than $26 billion last October. In June, the company stopped disclosing its total AUM on its website.

Bitcoin had a rough start to 2022

Bitcoin ended 2021 up almost 70%. That’s a fantastic return for any asset class, let alone one without any material value or full faith and credit to a national economy behind it.

Nevertheless, a 70% annualized return represents a downturn for Bitcoin after gaining more than 300% in the lockdown-ravaged year of 2020.

By 2022, investors are in a risk-on mood, embracing “a general flight to safety across the board in most asset classes,” said Alex Reffett, co-founder of wealth management firm East Paces Group. “Overall, investors have shown more interest in value-based investments and less in speculative stocks and alternative ‘stores of value’ investments.”

The Fed is battling a historic rise in inflation that rivals anything seen in the past four decades. Exactly how many hikes remain is unclear, but analysts expect the central bank to continue raising rates through the end of the year and into 2023. The fed funds rate could end the year at 3.5% or higher by some estimates.

When the Fed raises interest rates, it reduces demand for more growth companies – such as tech stocks – and speculative risk assets – such as cryptocurrencies and Bitcoin.

Judging how much demand for crypto will remain with all the liquidity drying up is an open question.

“We have no historical precedent for how Bitcoin and other cryptos might behave if we enter a prolonged period when central banks are actively draining liquidity,” said Interactive Brokers chief strategist Steve Sosnick. “It tends to be tough times for investors, and riskier assets tend to underperform safer ones.”

Bitcoin is a risky asset

Risk assets are investments that experience significant volatility in the normal market.

Stocks, commodities, high yield bonds, currencies – and Bitcoin – are risky assets because you can expect their prices to move up and down frequently in almost any market condition.

Until recently, Bitcoin was considered a store of value that was somewhat immune to fluctuations in the value of risky assets. That is no longer the case. Today, Bitcoin and the broader crypto market are affected by economic phenomena that shift the importance of risk assets such as inflation, stock markets and Fed monetary policy.

“The reason this decline is happening this year is because market narratives have shifted from risk-on to risk-off,” said Richard Smith, author of the Risk Rituals Newsletter. “Liquidity is drying up as the Fed and other central banks begin to reduce excess stimulus.”

Experienced Bitcoin traders are no strangers to carrying markets. The price of BTC fell more than 80% in the period 2017-2018. But that was before big companies, like Fidelity and PayPal, invested billions in getting into the crypto game.

New crypto owners should know how much nerve it takes to stick with Bitcoin over time.