Why is crypto down today? The factors behind crypto values

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The price of bitcoin, ethereum and other cryptocurrencies fell on October 13. For those new to the digital money trading market, the fluctuations in prices can be mysterious. But a few factors between crypto and traditional investment markets can answer the question: why is crypto down today?

Read: 5 Things You Must Do When Your Savings Hit $50,000

What is crypto?

A cryptocurrency is a form of digital money, which can be used in transactions governed by a system known as a blockchain. A blockchain is a public ledger that keeps track of all transactions that take place using a single cryptocurrency such as bitcoin. The blockchain operates outside the normal channel of government and central banks, which control the creation and flow of fiat money in the financial system.

Cryptocurrencies are also a tool for speculation and investment. They trade 24/7 and their value rises and falls with supply and demand. Bitcoin reached its all-time high of around $65,000 in November 2021. By October 2022, it had fallen below $20,000.

The demand for crypto is related to its perceived utility as a legitimate medium of exchange. Can you use it to buy or sell things? Can you use it to save? Can you make money trading it? These questions are asked and answered every day by news and events in the financial world.

For example, the news of a large company accepting bitcoin as payment for its goods will tend to increase crypto values. In contrast, the news of a country banning bitcoin will negatively affect the price. In addition to this, the results of traditional stock markets and the economy have an impact.

Why did crypto values ​​fall?

The main drivers for the financial markets in 2022 have been persistently high inflation and rising interest rates. Inflation is another word for rising prices, caused by an imbalance in supply and demand for goods and services. The inflation rate is measured and announced each month by the Bureau of Labor Statistics. At 8.2%, the inflation rate, measured by the consumer price index, was up 0.4% from August to September, making it slightly higher than expected.

On the day of the announcement, the largest crypto by market capitalization, bitcoin, fell more than 4%. Other ethereum fell more than 6%. Other major coins followed suit, with cardano down 7%, solana down 8% and ripple shedding 5% of its value. The current values ​​of these digital assets have declined significantly since reaching the high-water mark late last year. Ethereum, for example, is trading around $1,200 after reaching $4,900 in November 2021.

Interest

Another key driver of the fall in crypto values ​​has been rising interest rates, which is also a negative factor for stocks. With inflation still high, the US Federal Reserve has raised its benchmark federal funds rate. The aim is to slow down the economy by making it more expensive to borrow; the lower demand that results is supposed to dampen inflation.

The federal funds rate was at 3.25% in October 2022, after a series of increases it raised from 0.5% in March. Many observers predict that interest rates will remain high or rise further in 2023.

There are other reasons for a fall in crypto values. Through the first half of 2022, the correlation between crypto prices and the stock market remained relatively strong. When the stock market falls, crypto follows. Why? When investors lose interest in risky investments, they usually turn away from crypto as well as stocks. Both are generally considered riskier than savings accounts, US Treasuries or cash.

Volatility and correlation fall

The cryptocurrency market is notorious for volatility, with prices rising sharply and falling just as quickly. Since early 2020, the average range between peak and trough in crypto prices over a month has been 80%. But late in 2022, this choppy trade calmed down, with the price range dropping to just 23%.

It was a hallmark of 2022 that crypto followed the markets. The bear market in stocks brought bitcoin down sharply from its 2021 highs. But the correlation between the crypto market and stock indices such as the S&P 500 appears to be diminishing.

A “correlation coefficient” that measures how closely bitcoin tracks the S&P 500 fell from 0.70 to 0.61 in October. While corporate earnings announcements moved stock markets, bitcoin and other cryptocurrencies were not affected in the same way.

Regulation

A long-term factor weighing on cryptocurrencies is government regulation of the market. As a new and innovative financial system, the cryptocurrency market will be subject to control and regulations imposed by authorities. These are constantly changing with new rules replacing old ones or being written for the first time.

Governments that make the rules of the financial system see their monopoly on creating new money threatened. It is uncertain what final form their regulation will take, but China and several other countries have completely banned crypto ownership. The US allows crypto trading as well as mining, the process of creating a new cryptocurrency. El Salvador and the Central African Republic have adopted bitcoin as legal tender.

A confusing patchwork of different regulations around the world will slow the growth of the crypto markets and keep investors wary of committing money to them.

Start a crypto investment

Even with decreasing volatility, crypto prices often fluctuate higher than stocks or bonds. That’s what makes them risky. But volatility also provides an opportunity for high percentage gains.

Before getting into crypto investing, it’s a good idea to explore alternatives. There are hundreds of crypto coins available for buying and selling. Some are more used and traded than others and some have better prospects for future growth.

Check the statistics of the total market capitalization and the number of daily transactions in the crypto. Also check the trading volume, the number of coins in existence and whether there is a hard cap on the number of coins – as there is with bitcoin. As with any other asset, a restriction on supply will tend to increase demand and value.

It is also a good idea to formulate a final goal. Do you want to profit from short-term price fluctuations or participate in the future of a “decentralized finance” system? The former requires a constant flow of current information; the latter, patience and knowledge gained through research.

The information is accurate as of November 4, 2022.