Why is Bitcoin Crashing in 2022?

Why is Bitcoin Crashing in 2022?

crypto crash

There are many factors that have contributed to the price of Bitcoin falling from its November 2021 peak. These include global inflation, tighter monetary policies, and China’s crackdown on cryptos. But which of these factors is the main cause of the fall? Dr Larisa Yarovaya, associate professor of finance at the University of Southampton, believes it’s a combination of factors.

Global inflation

The recent invasion of Ukraine by Russia has caused a 30% drop in the Ruble against the US dollar. This prompted the Central Bank of Russia to hike its key lending rate to 20% in an attempt to stop runaway inflation. Meanwhile, Bitcoin trading activity in Russia rose to a nine-month high. During the same time period, a global oil price rally started. By 2022, Brent and US crude oil were up over 50%. These price hikes are expected to lead to increased global inflation.

Rising prices mean more pain for consumers and threaten economic growth. As a result, the Fed has acted to curb inflation by raising interest rates. It is also trying to reduce the money supply. These measures will likely continue in the future. If inflation continues unabated, Bitcoin will crash.

Inflation has been a major problem for the cryptocurrency market in recent years. Despite being touted as a hedge against inflation, cryptocurrencies have not lived up to the hype. In March 2022, the rate of inflation was 8.5% – the highest in over four decades. In April, the rate was 8.3%. With prices rising rapidly, people may pull their money out of non-essential investments and seek alternative investments.

Which has Bitcoin been crashing in 2022
Traditionnal markets are down too!

Tighter monetary policy

While the stock market has remained relatively stable over the past year, the upcoming year of 2022 could be particularly turbulent. With interest rates on the rise, the Fed has signaled that it may tighten monetary policy, which could lead to volatility.

Moreover, it could trigger a run on Tether, causing a disruption in crypto-asset markets and reducing trading and price discovery. This scenario could become chaotic and result in significant losses for individual investors. While the contagion effects to the broader financial system are likely to be minimal, the impact on individual investors could be significant.

Although the overall crypto market remains small compared to the size of the economy, more traditional financial institutions are dabbling in crypto-assets. The Acting Comptroller of the Currency recently warned banks to be careful about their crypto-asset exposure and derivatives, as the value of these instruments is still quite volatile. Regulators are divided over whether or not these risks pose a threat to the financial system.

Chinese crackdown on cryptos

The Chinese government has a vested interest in keeping cryptos out of its country. The country’s central bank, the People’s Bank of China (PBC), has banned all cryptocurrency exchanges and initial coin offerings (ICOs). However, many Chinese citizens are using peer-to-peer trading and offshore exchanges to avoid the ban. The country’s central bank also views cryptos as speculative investments that are threatening its environmental goals. It also argues that cryptocurrencies are a means of money laundering.

The Chinese crypto ban has already had an impact on the market. Early on, it caused small spikes of selling pressure in the middle of the year. In May, phase 1 of the ban triggered a negative price shift during Asian working hours. This was followed by phase two, which resulted in more sell-offs in late June and July. But after this initial shock, the outright ban has had little impact on prices. Moreover, phase three of the ban has a far more pronounced effect than phase one.

In addition, the government has lowered taxes on crypto mining to 15% of the income. However, exchanges from cryptos to fiat currency are not taxable. Furthermore, the Chinese government has also implemented new AML/CFT regulations relating to cryptos. These rules prohibit anonymous accounts. They are a response to the new risks posed by digital assets. In Europe, lawmakers have also been debating a change in the tax structure for cryptos. Currently, cryptos are taxed like movable property.

Bitcoin’s fall from its November 2021 peak

Bitcoin’s fall from its November 2021 high in 2022 has left the price of the digital currency at an all-time low. Currently trading for just under $33,000, it’s down more than half from its peak in November. The cryptocurrency’s price drop comes at a time when the stock market is experiencing a severe slump. Over the past four days, the S&P 500 and Dow Jones fell by nearly 2%. Even some of the leading cryptocurrencies suffered a similar fate.

As the market declined, bitcoin’s price fell, wiping out nearly $2 trillion in value. This fall was exacerbated by rising inflation and the Federal Reserve’s decision to scale back bond buying. This move reduced liquidity in the market, which led to an increase in the 10-year Treasury note. This forced investors to price in the prospect of higher interest rates, which shook riskier assets such as bitcoin.

While many experts are optimistic about the future of bitcoin, its volatility should not be underestimated. The Bitcoin price may fall again, but the bottom may not be in sight for quite some time. It may be closer to the 15,000 point level than the previous fall.

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