Why is the crypto market down today?

Crypto prices keep falling, but why? This year’s market crash has turned most of the winning portfolios into net losers, and new investors are likely to lose hope in Bitcoin (BTC).

Investors know that cryptocurrencies show higher than average volatility, but this year’s downturn has been extreme. After reaching a stratospheric all-time high of $69,400, Bitcoin price crumbled over the next 11 months to an unexpected annual low of $17,600.

That is a decrease in value of almost 75%.

Ether (ETH), the largest altcoin by market cap, also saw an 82% correction as its price fell from $4,800 to $900 in seven months.

Years of historical data show that pullbacks in the 55%-85% range are the norm after parabolic bull market rallies, but the factors weighing on crypto prices today are different from those that triggered sell-offs in the past.

At the moment, investor sentiment remains soft as investors avoid risk and wait to see if the Federal Reserve’s current monetary policy will alleviate persistently high inflation in the US. On September 21, Fed Chair Jerome Powell announced a 0.75% rate hike and hinted that increases of a similar size would occur until inflation falls closer to the central bank’s 2% target.

Let’s take a deeper look at three reasons why crypto prices will continue to fall in 2022.

Federal Reserve rate hikes

Raising interest rates increases the cost of borrowing money for consumers and businesses. This has a knock-on effect of increasing the business’ operating costs, the cost of goods and services, production costs, wages and ultimately the cost of almost everything.

High inflation that cannot be suppressed is the main reason why the US central bank raises interest rates. And since the rate hikes began in March 2022, Bitcoin and the broader crypto market have been in a correction.

When monetary policy or metrics that measure the strength of the economy change, risk assets tend to signal, or move, earlier than stocks. In 2021, the Fed began to signal its plans to eventually raise interest rates, and data shows that the Bitcoin price has corrected sharply by December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled what lay ahead for the stock markets.

If inflation begins to slow, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risk assets such as Bitcoin and altcoins could once again be the “canaries in the coal mine” by reflecting the return of risk-on investor sentiment.

The persistent threat of regulation

The cryptocurrency industry and regulators have a long history of not getting along, either due to various misconceptions or mistrust of the actual use of digital assets. Without a functioning framework for regulating the crypto sector, different countries and states have a plethora of conflicting guidelines on how cryptocurrencies are classified as assets and exactly what constitutes a legitimate payment system.

The lack of clarity on this issue is weighing on growth and innovation within the sector, and many analysts believe mainstreaming of cryptocurrencies cannot happen until a more universally agreed and understood set of laws is enacted.

Risk assets are heavily influenced by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations, or at worst an outright ban, continues to affect crypto prices on an almost monthly basis.

Fraud and Ponzier triggered liquidations and repeated blows to investor confidence

Fraud, Ponzi schemes, and high market volatility have also played a significant role in crypto prices crashing through 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry, and the market being relatively small compared to the stock markets.

The implosion of Terra’s LUNA and Celsius networks as well as the abuse of influence and client funds by Three Arrows Capital (3AC) were each responsible for subsequent blows to asset prices in the crypto market. Bitcoin is currently the largest asset by market cap in the sector, and historically, altcoin prices tend to follow whatever direction the BTC price goes.

As the Terra and LUNA ecosystem collapsed in on itself, the Bitcoin price corrected sharply due to multiple liquidations occurring in Terra – and investor sentiment plummeted.

The same thing happened on an even larger scale when Voyager, 3AC and Celsius collapsed, wiping out tens of billions in investor and protocol funds.

Related: Wen moon? Probably Not Soon: Why Bitcoin Traders Should Be Friends with the Trend

What to expect for the rest of 2022 to 2023

The factors affecting falling prices in the crypto market are driven by Federal Reserve policy, meaning the Fed’s power to raise, pause, or lower prices will continue to have a direct impact on Bitcoin, ETH, and altcoin prices.

Meanwhile, investors’ risk appetite is likely to remain subdued, and potential crypto traders may consider waiting for signs that US inflation has peaked and that the Federal Reserve is beginning to use language indicative of a policy pivot.