Cryptocurrencies opened the year with a bang, fattening investors' pockets and, in the last month, have fallen again. Bitcoin is down -3.9%, while Ethereum is also down -4.0% on a 30-day basis since reaching a yearly high of $31,800 and $2,022 respectfully. As is usually the case, altcoins are also in the red, with the total market capitalization of the cryptocurrency down over $20 billion in the last week.
Why is this and why is the crypto market falling? Understanding cryptocurrency volatility can be challenging, even for experienced investors. However, there are a number of factors that influence these price changes, and many of them are similar to those in the traditional stock market. Let's jump right into them.
First, it is necessary to consider that crypto assets are variable income assets and have high volatility. Thus, although the crypto market has become more solid, it is normal for there to be moments of ups and downs, including sudden price changes.
In 2021, for example, the cryptocurrency market peaked in November, reaching a capitalization of $2.9 trillion. However, in the middle of the following year it dropped by more than 60%. To understand this phenomenon, it is necessary to consider that the crypto market, being decentralized, has its own dynamics.
Macroeconomic conditions play a key role in determining the value of cryptocurrencies. This may seem counterintuitive, as the original idea behind Bitcoin and many other cryptocurrencies may have been to act as a store of value, a “digital gold”, immune to the vicissitudes of the traditional financial world. However, with the gradual popularization and consolidation of digital currencies, they are also becoming increasingly connected with the global market .
For example, in mid-2022, cryptocurrencies felt the generalized devaluation movement of variable income assets . Some of the factors e that explained this movement was:
The 4% drop of BTC price in the July is not as expressive given the strong volatility characteristic of the crypto market, but it did light a signal, as the period was marked by events that could have generated a greater impact, whether negative or positive, such as the rise of interest rates by the Federal Reserve (Fed, the central bank of the United States), the progress of discussions on federal legislation for the US market and the partial victory of Ripple over the SEC.
Regulatory concerns have played a big role in the recent cryptocurrency market meltdown. The rapid growth and changing nature of cryptocurrencies has caused governments around the world to struggle, which has led to increased scrutiny and regulatory initiatives.
Investors and companies participating in the crypto space may become uncomfortable if stricter rules or confusing legal frameworks are introduced. Furthermore, market sentiment can be affected and sell-offs can be triggered by government crackdowns on unregulated exchanges, initial coin offerings (ICOs) or cryptocurrency trading
Regulations on cryptocurrency operations have also been implemented by regulatory organizations as a result of concerns about money laundering, fraud and investment protection. Investors may be reluctant to enter or remain in the market, which would put downward pressure on prices.
In addition to the factors that affect any investment asset, digital currencies are currently hit by a confidence crisis. The global crisis and the crisis of confidence feed off each other.
Cryptocurrency market market is significantly influenced by investor attitude. The emotions and beliefs of market participants have a significant impact on cryptocurrencies, which can lead to severe price fluctuations. The cryptocurrency market has often been described as an emotional roller coaster, with investors being happy/greedy during rallies and fear during market downturns. The uncertainty in the decision of investors due to the confidence crisis is also responsible for the crypto market drop.
The cryptocurrency market has been severely dragged down due to general concerns about the most recent Binance charges, SEC allegations, and the prospect of global inflation. On the other hand, the downward trend of Bitcoin and other coins like BNB, Dogecoin, Solana, and so forth has been stabilised amid cooling inflation statistics and a number of other global variables.
The Federal Reserve kept interest rates stable in the United States during the June FOMC meeting, disrupting the 15-month cycle of rate increases. This caused the dollar to rise and the U.S. treasury to become more volatile, which may have encouraged more investors to invest in risky assets like cryptocurrencies.
The current global crypto market cap is $1.17 trillion, with a total crypto market volume that has clocked over $41.98 billion, over the last 24 hours which marked a 15.82% increase. The last year has been brutal to cryptocurrencies, however the year has been good to crypto so far.
Since the beginning of the year the crypto market has accumulated a significant increase and there has been an important recovery in view of the losses of 2022. BTC is still up 77% and ETH is up 55%, from January to July.
Let's have a look at the summary of total crypto market cap from November 2021 to June 2023.
A combination of factors, including record inflation, fear, rising interest rates and a lack of confidence in cryptocurrency investments, caused the cryptocurrency market to collapse. Analysts claim that “macro” causes are primarily responsible for the problems, rather than being specific to the cryptocurrency market.
The overall positive sentiment is due to several optimistic factors such as weakening dollar index and inflation combating methods that are currently employed in the U.S,.
If you are interested in cryptocurrencies but are on the sidelines, the recent fall in price may convince you that now is the time to “buy the low.” . Prices have recovered in the past, but it may take some time before they recover again. However, always do your research and consider risk before investing.