The correction in the cryptocurrency market began simultaneously with the technological segment of the U.S. stock market — in late fall 2021 when investors finally realized the obvious fact: the Fed had ignored inflation for too long, and now the regulator would have to catch up by applying even tougher measures than expected. Losing risk appetite is a key driver of the downturn in digital assets, and as long as each central bank seeks to strengthen its own currency to depress import prices, no positive change can be expected.
This year, the Fed and even the ECB have implemented harsh monetary restriction measures, despite the obvious economic problems in the Eurozone. This process has substantially increased the cost of funding speculative operations and dealt a severe blow to financial markets. Over the past few years, we’ve seen the entry of major players who previously worked with traditional assets into the crypto market. As a result, stock market turbulence couldn’t help but have a negative impact on digital tools.
The cryptocurrency community will mainly remember two major bankruptcies of the past year. The first is certainly the Terra case, which greatly overrated the pricing mechanism of its stablecoin, resulting not only in LUNA’s devaluation and the collapse of its supposedly promising competitor Ethereum but also in another round of market cap decline. A series of huge bankruptcies — 3AC, Celsius, and others — led to prolonged turbulence. When the worst seemed to be over, Sam Bankman-Fried’s machinations were uncovered.
The fall of Sam’s empire was sudden and extremely rapid. However, the market will have to deal with the aftermath for a long time. The situation is worsened by the fact that just a few months ago, the Terra story happened, and the major players haven’t had time to fully recover from the shock. The Digital Currency Group, which financed 3AC’s operations and eventually had to cover the gap with funds from its subsidiaries, is a case in point.
Obviously, it caused severe reputational damage to the industry. From now on, people will be very cautious when it comes to digital assets. Add to that the aforementioned lack of demand for risky instruments, and you get a perfect recipe for a long-term correction. Interestingly, the Fed admits to maintaining tight conditions until 2024, while Bitcoin halving, a significant event for the crypto market, is due to happen in early 2024. To put it another way, the bear market may last at least another year, during which the scandals of 2022 can be forgotten. Until then, Bitcoin has every chance of falling below $10,000.
(If you want to discuss the column’s topic with its author, Anton Bykov, Senior Analyst at Esperio, you can email the editorial team at media@coinspaid.com — ed.)
