Why are cryptocurrency prices dropping?
The prices of cryptocurrencies have suffered significant drops in recent days, influenced by the rise in interest rates of the United States Federal Reserve and the high inflation that shakes that country.
On the one hand, the FED approved an increase of 50 basis points in interest rates at its May meeting, to a range of 0.50% to 1%. This, in a race to tackle US inflation, which has reached a maximum of more than 40 years in recent months and whose results for April were released this Wednesday, May 11. Read more in cryptocurrency news .
The market foresaw that inflation would remain above 8% in 12 months and it was not wrong. The consumer price index (CPI) rose 8.3% in April , above the Dow Jones estimate of 8.1%, the US Bureau of Labor Statistics reported on Wednesday. Thus, the cost of living recorded its largest increase in 12 months since 1981, when it was 9.4%.
Crypto Drops
The price of bitcoin (BTC), the world’s largest cryptocurrency, traded below $28,000 on Wednesday, hitting a low of $27,679.99. With these records, the crypto has dropped 27.75% in a month; -34.37% in three months; -55.67% in six months; -38.17% in the last year and -43.08% in one year.
It is worth remembering that in November 2021 bitcoin reached an all-time high of $69,000 , however, its current price is barely even close to half of that record. Around 7:00 pm (Colombian time) the cryptocurrency was trading at an average of US$28,800 , accumulating losses close to 7%.
“If we look back on what is happening, at the beginning of 2020, when the pandemic was declared, bitcoin fell 50% of its value , which is happening today, and later, it began its upward path. That makes us think that the trend may be reversed at some point , ”explains Alejandro Beltrán, co-founder and country manager of the Exchange company, Buda.com, for Colombia, in dialogue with Valora Analitik .
Other cryptocurrencies have also registered sharp drops in recent days, as is the case of ethtereum (ETH) that this Wednesday reached a minimum of US$2,005, Binance/Bitcoin (BNB) that was below US$300 or Cardano below of the US$0.50.
According to Beltrán, these drops occur “in a macroeconomic situation where cryptos are assets that in the short term where investors leave high-risk assets and take shelter in safe assets.”
“The economic uncertainty affects this scenario that we have experienced on different occasions such as the pandemic or the crisis of 2016 and 2018, where cryptocurrencies also suffered a temporary downward effect . Most cryptos are positively correlated with bitcoin, therefore, they all end up droping. A few more because, as is the case with the stablecoin terra (LUNA), this parity was left with no chance of generating liquidity and so much so that it could not withstand the oversupply that there was,” underlines the co-founder of Buda.com.
“In that sense, we see that all cryptocurrencies are going to respond to all these very short-term macroeconomic effects , but in the end we believe that there is no impact on the structural part, at least in the case of bitcoin,” says Beltrán.
The million dollar question for investors is whether the price of cryptocurrencies can fall further in the coming days. Although only hypotheses can be made about this possibility due to the volatility of the markets, in dialogue with Valora Analitik, Sebastián Cuadros, business developer manager, points out that “it is something very feasible, because the measure has just started and, therefore, therefore, until now we will begin to see how economic and non-economic actors adapt to this measure. And cryptos also enter this field, at least for a while.
The market is immersed in the uncertainty of what may happen to cryptocurrencies at the moment, which ones may have a tendency to fall more and which less. In this regard, Cuadros stresses that “it is a difficult question, because we would have to look at many factors, not just the latest monetary measures .”
“If we look at the patterns when these phenomena occur, we see that despite the fact that the main ones go down with high percentages, due to their greater acceptance and strength throughout the crypto market, the volatility does not exceed other altcoins that can reach higher percentages. of 70%-80% in losses in the face of economic phenomena such as the one we are observing”, highlights the business developer manager.
“Generally the most popular are the ones that have lost the most. In this case, bitcoin, ethereum and cardano were the ones that suffered the most , while others such as ADA, Doge, Avax, and DOT, do not suffer the loss as much because they are less popular”, notes Cuadros.
MOON
The Terra network has two cryptocurrencies: terra (LUNA) and terra USD (UST). The two registered significant falls on May 9, which continued their downward path this Wednesday. It should be noted that, being a stablecoin, it should always remain at US$1 , however, this May 11 it was trading below US$0.80, around 7:00 pm (Colombia time).
“This is a stablecoin that replicates the dollar parity and what happened is that there was an oversupply that moved 30% below the dollar parity , which generated a lot of nervousness and, above all, a lot of illiquidity in the basket. of assets that supports the stablecoin”, explains Beltrán.
“It turns out that a stablecoin, like an ETF, is made up of an asset or a basket of assets that are tokenized, backed, and replicated one by one. That cryptocurrency drops below price parity and a lot of people try to buy it, but full liquidity is lost . There is no backing asset behind LUNA, therefore, by securing the anchor, neither the decentralization of the asset nor the real backing it should have was guaranteed”, he concludes.