Since 2022 started, the total crypto market cap has seen a decline of nearly 600 billion dollars. The last week in particular has been extremely volatile. Bitcoin is down over 16 percent over the last 7 days, according to CoinMarketCap. Ethereum is down over 24 percent, and nearly every other top digital asset is down over 10percent. A big factor of the selloff comes from stocks dropping and inflation continuing to rise. Everything from groceries to housing is getting more expensive, and there is fear in the air among retail investors. An additional part of this selloff comes from Russia’s announcement for a possible ban on cryptocurrency trading and mining. At this point, talk of crypto bans are a normal part of the industry, and shouldn’t affect prices too heavily. Although that may be true, it doesn’t help on top of the massive dip stocks have seen in the last week, specifically tech stocks.
Crypto prices tend to move with the stock market. Digital assets also have a history where they tend to be more volatile and often see bigger swings in price when the markets go up or down.
A repeating pattern
This isn’t the first time crypto markets have seen massive dips. In early 2018, the market was at nearly $800 billion, and by the middle of the year barely sat at $100 billion in market cap. It took a couple years to recover, but eventually hit new highs. Even earlier in 2021 the market saw a dip of over a trillion dollars, and then proceeded once again to hit all time highs.
History tends to repeat itself. On top of that, nothing in the technology changed over the last 70 days crypto has dipped. There are many long-term investors who buy into the digital assets market because they believe in the fundamentals and the technology behind the assets. Blockchain technology provides the means for decentralized currency and finance. People are taking their paychecks in Bitcoin because they see the usefulness of the technology backing it and understand its implications on the future of privacy, finance, and economy.
What do the next few months hold?
Many stocks that saw a positive surge in price during the 2020 pandemic era are now seeing major price drops. It is expected that the Fed, with current chairperson Jerome Powell, will raise interest rates multiple times throughout 2022. Raised interest rates make the returns on government bonds more appealing. This has been a very influential factor on the drop in prices of speculative assets, like tech stocks. Investors are moving their money out of these speculative assets and now moving them into more stable assets that benefit from the interest rates like bonds. Returns on these bond investments are more secure and safe, while investments in speculative assets are viewed as higher risk.
For the time being, the rest of the crypto market still largely moves in response to Bitcoin. Bitcoin price, although more volatile in nature, correlates with stock market movements. The other digital assets in the crypto market respond to Bitcoin’s movements, which have recently seemed bearish. For as long as Bitcoin continues to follow its pattern of correlation with stocks, it seems likely that crypto prices will continue to decline.