Bitcoin (BTC) price is struggling to hold onto a marginal 0.23% gain on Oct. 20, but generally crypto prices are falling across the board and the wider market remains in a sharp downtrend. Bitcoin price continues to trade under $20,000, at a level which many investors believe is a psychologically significant support and resistance level.
Concern over the United States Federal Reserve’s “lack of progress” on tamping high inflation is the likely reason for the lengthy malaise seen in crypto prices. On Oct. 20, Philadelphia Federal Reserve President Patrick Harker suggested that higher interest rates have not been effective in curbing inflation, concluding that “we are going to keep raising rates for a while.”
Many analysts believe that the Fed’s aggressive rate hikes represent another policy error — the first being waiting too long to address rising inflation — and that 2023 will see the advent of a deep recession.
September’s consumer price index (CPI) print showed consumer prices rising by 0.4%. Compared to a year ago, consumer prices are now 8.2% higher, according to data from the Bureau of Labor Statistics.
In addition to a 0.4% increase in consumer prices, the core CPI rose by 0.6% month-to-month since September and by 6.6% over the past 12 months, when food and energy prices are removed..
In brief, rising inflation is the absolute last thing the Federal Reserve wants to see. The Fed’s rate hikes are meant to cool off the economy and put a damper on high inflation, so the Oct. 13 higher-than-expected report is likely to translate into another round of 0.75 basis point hikes in the upcoming months.
Given the high correlation between crypto and equities markets, Bitcoin’s price action tends to follow the direction of the S&P 500 and the Dow, and a number of economic events occurring in mid-October could continue to pressure crypto prices.
The following dates highlight important economic events that have a history of impacting investor sentiment in the crypto market:
- Oct. 17 – end of month: Q3 earnings
- Oct. 28: Personal Consumption Expenditures (PCE) price index
This week a number of major US companies are reporting quarterly earnings and the mixed bag of results are causing volatility in equities markets. Tesla (TSLA) stock dropped by 6.2% after its Q3 earnings target was missed, with the electric vehicle manufacturer citing production and delivery challenges.
In addition to these upcoming events, the strength of the United States dollar and what appears to be a serious escalation in the conflict between Ukraine and Russia continue to weigh on all markets.
Let’s take a deeper look into three reasons why crypto prices keep falling in 2022.
Federal Reserve interest rate hikes
Raising interest rates increases the cost of borrowing money for consumers and businesses. This has the knock-on effect of raising business operational costs, the costs of goods and services, production costs, wages, and eventually, the cost of nearly everything.
High, unsuppressable inflation is the primary reason the United States Federal Reserve is raising interest rates. And since rate hikes began in March 2022, Bitcoin and the broader crypto market have been in a correction.
When monetary policy or metrics that measure the strength of the economy shift, risk assets tend to signal, or move, earlier than equities. In 2021, the Fed started signaling its plans to raise interest rates eventually, and data shows Bitcoin price sharply correcting by December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled what lay ahead for equities markets.
If inflation begins to taper, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risk assets like Bitcoin and altcoins could again be the “canaries in the coal mine” by reflecting the return of risk -on sentiment from investors.
The persistent threat of regulation
The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets. Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.
The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.
Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.
Scams and Ponzis triggered liquidations and repeat blows to investor confidence
Scams, Ponzi schemes and sharp market volatility have also played a significant role in crypto prices crashing throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry and the market being relatively small compared with equities markets.
The implosion of Terra’s LUNA and Celsius Network as well as misuse of leverage and client funds by Three Arrows Capital (3AC) were each responsible for successive blows to asset prices within the crypto market. Bitcoin is currently the largest asset by market capitalization in the sector, and historically, altcoin prices tend to follow whichever direction BTC price goes.
As the Terra and LUNA ecosystem collapsed on itself, Bitcoin price corrected sharply due to multiple liquidations occurring within Terra — and investor sentiment tanked.
The same happened with even greater magnitude when Voyager, 3AC and Celsius collapsed, erasing tens of billions in investor and protocol funds.
Related: Here’s what could spark a ‘huge BTC rally’ as Bitcoin clings to $19K
What to expect for the rest of 2022 through 2023
The factors impacting falling prices within the crypto market are driven by Federal Reserve policy, meaning the Fed’s power to raise, pause or lower rates will continue to have a direct impact on Bitcoin price, ETH price and altcoin prices.
In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that US inflation has peaked and for the Federal Reserve to begin using language that is indicative of a policy pivot.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.