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Why does bitcoin crash? Its much older and more established cousin, the stock market has the answer.
Bitcoin, ether and the broader crypto market faced another wave of sales on Monday, with the world’s most traded digital currency falling another 8% amid a sell-off that saw the digital token lose about a quarter of its value in January alone. .
Bitcoin fell to $33,070, its lowest level since July 24, a 25% plunge since January 3. From its November 8 peak of 67,553.95, the cryptocurrency is now down more than 51%. The broader cryptocurrency market itself has seen about $130 billion in value disappear in the past 24 hours.
Ether, the second-largest cryptocurrency, is down more than 12% to $2,205, its lowest point since July 28. The native token of the Ethereum blockchain has lost 38% this month. Other prominent coins such as Solana’s SOL, Cardano’s ADA and Polkadot’s DOT were down anywhere from 12% to 15% Monday morning.
Related: Bitcoin is being crushed. What is Bitcoin really worth?
Drops in the cryptocurrency market followed a rough start to the year for equities as investors reassess where the US and global economies are headed and what the Federal Reserve and other central banks are doing to slow down strong growth and curb inflation. accelerate.
The reason: Bitcoin and other cryptocurrencies have become more intertwined with markets, with bitcoin alone having the highest correlation with the stock market since September 2020.
That means when the stock market falls, which it certainly has since kicked off in 2022, so does bitcoin.
Bitcoin is a commodity, except when it isn’t
“Cryptocurrencies are no longer an isolated risk asset and respond to changes in global policy,” Clara Medalie, research director at cryptocurrency market data provider Kaiko, told The Wall Street Journal. “Unsurprisingly, both will become more volatile as the liquidity taps close.”
TheStreet recommends: Do you want to invest in cryptocurrencies? Consider these investment strategies
And those faucets are generally expected to be turned off soon. Indeed, the Fed is expected to raise interest rates sooner or later, possibly as early as March, to slow the economy by stopping people and businesses from lending. Rising rates make borrowing more expensive for consumers and businesses.
“We see a risk that the [Federal Open Market Committee] will want to take some tightening measures at every meeting until the inflation picture changes,” Goldman economist David Mericle wrote in a note to clients published this weekend. Fed futures currently estimate interest rates will rise by four quarters of a point this year.
Related: Why Is Bitcoin’s Price Up And Down?
Those who continue to believe in bitcoin’s short-term valuation levels also continue to believe in its long-term viability as an asset that can function as a commodity. The argument for the value of bitcoin is similar to that of gold: there is only a limited amount of it to mine, and the more people want it, the higher its value becomes.
Bitcoin is specifically limited to an amount of 21 million; the last coins are expected to be mined in the year 2140. On the other hand, bitcoin and other opponents of digital assets continue to argue that it is difficult, if not impossible, to place a real-time value on something that does not physically exist.
At the same time, bitcoin’s widespread adoption as a store of value and as a hedge against other types of investment volatility makes it look much more like the stock market now, except without the diversity.
The entire cryptocurrency ecosystem is under pressure
Peripheral cryptocurrency players, including bitcoin exchange Coinbase Global (CURRENCY) also continued to suffer alongside the broader rout, with Coinbase shares falling another 7% in premarket trading Monday, after falling more than 13% on Friday.
The accompanying decline in the value of crypto stocks such as Coinbase and MicroStrategy (MSTR) – Get MicroStrategy Incorporated Class A Report as well as US-listed mining companies such as Marathon Digital Holdings (MARA) – Receive the Marathon Digital Holdings Inc report, Riot blockchain (REVOLT) – Get Riot Blockchain Inc Report and bit digital (BTBT) – Get Bit Digital, Inc. Report suggest that institutional investors do not view bitcoin and other digital assets as a place to seek refuge or earn higher returns.
Related: Buying The Dip? Lessons from the first Bitcoin sale in 2022
Marathon, Riot and Bit Digital are each down more than 50% since Nov. 10, according to data from charting platform TradingView.
Argo blockchain (ARBKF), the only cryptominer listed on the London Stock Exchange, is down 45%, while Canadian cryptominer Hive Blockchain (HIVE) – Get the HIVE Blockchain Technologies Ltd report and Hut 8 Mining (cabin) – Get Hut 8 Mining Corp. Report 52% and 59% respectively have fallen.
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