Why Is Bitcoin Down Today?

 Bitcoin (BTC) slipped below $20,000 on Monday, with investors selling the news from Friday when the Federal Reserve reaffirmed its position to use higher interest rates to reign in inflation.

As of this writing, BTC is down 8.5% over the past five days. The original crypto is now at its lowest price point since July 13.

Ethereum, the leading altcoin, has fallen nearly 11% in the past five days. Ethereum has experienced even more turbulence than Bitcoin recently, with news emerging of bugs found in its anticipated network upgrade, commonly referred to as the Merge.

The Fed is expected to deliver the last of its big rate hikes during its September 20-21 meeting. Wall Street economists predict a 50 to 75 basis point (bps) increase.

Experts say the Fed has nearly no choice in the matter, as U.S. inflation has risen to levels not seen in over four decades. The Fed’s tightening of monetary policy is putting a damper on the easy cash that some crypto projects had become accustomed to.

The total cryptocurrency market capitalization now stands at less than $1 trillion, a far cry from its $3 trillion capitalization in November 2021.

Bitcoin Bottom

Before Bitcoin hit a few snags this month, the original crypto had been trading at nearly $25,000 on Aug. 14, a substantial improvement from its prices in June when Bitcoin found its bottom.

For those who need a refresher: Bitcoin bottomed at its 52-week low of $17,708 on June 18. The drop followed news of several crypto companies facing a liquidity crunch.

Several days before Bitcoin’s bottom, crypto lender Celsius paused customer withdrawals because of “extreme market conditions.” Celsius has kept customer withdrawals and transfers frozen since June 13. The crypto firm filed for chapter 11 bankruptcy protection on July 13 after a month of turmoil.

Adding to the pile of crypto firm insolvencies, it was reported around June 16-17 that Three Arrows Capital (3AC), a Singapore-based crypto hedge fund, was insolvent.

On June 27, Three Arrows Capital (3AC) defaulted on a loan from Voyager Digital; the loan was worth about $350 million in crypto assets and comprised of USD Coin (USDC) and roughly 15,250 BTC. For those needing the backstory, 3AC was a major backer of TerraUSD/LUNA, the epicenter of last month’s stablecoin meltdown.

The series of liquidations from crypto lenders such as BlockFi, Voyager and Celsius spelled disaster for 3AC, sending the firm into bankruptcy.

Bitcoin prices are now down nearly 58% year to date, trading well off their all-time highs of around $69,000 in November 2021. Experts also say that BTC is no longer viewed as an inflation hedge, trading in lockstep with equities, which are also in a downturn.

Celsius, a decentralized finance (DeFi) platform and one of the largest crypto lenders was a big source of negative Bitcoin market sentiment in mid-June.

With up to 1.7 million customers, Celsius earned a cult following in the crypto world by advertising that users could earn an annual percentage yield (APY) of up to 18% by depositing their crypto holdings on the company’s platform.

The company takes crypto deposits and loans them out to other investors and financial institutions in a process analogous to conventional bank lending. Users earn yield from the revenue Celsius generates from crypto borrowers.

The company had $11.8 billion worth of assets under management (AUM) as of May 17, down from more than $26 billion in October last year. In June, the company stopped disclosing its total AUM on its website.

Bitcoin Had a Rough Start to 2022

Bitcoin ended 2021 up nearly 70%. That’s a fantastic return for any asset class, let alone one without any tangible value or the full faith and credit of a national economy behind it.

Nevertheless, a 70% annual return represents a comedown for Bitcoin after gaining more than 300% in the lockdown-ravaged year of 2020.

In 2022, investors are in a risk-off mood, embracing “a general flight to safety across the board in most asset classes,” said Alex Reffett, co-founder of wealth management firm East Paces Group. “Collectively, investors have shown more interest in value-based investments and less in speculative stocks and alternative ‘store of value’ investments.”

The Fed is fighting a historic surge in inflation that rivals anything seen in the last four decades. Just how many hikes remain is unclear, but analysts expect the central bank to keep raising rates through the end of the year and into 2023. The fed funds rate could end the year at 3.5% or above by some estimates.

When the Fed raises interest rates, it lessens demands for more growth companies—like tech stocks—and speculative risk assets—like cryptocurrencies and Bitcoin.

Judging how much demand for crypto will remain with all the liquidity drying up is an open question.

“We have no historical precedent for how Bitcoin and other cryptos might act if we enter a sustained period when central banks actively drain liquidity,” said Interactive Brokers’ chief strategist Steve Sosnick. “Those tend to be difficult times for investors, and riskier assets tend to underperform safer ones.”

Bitcoin Is a Risk Asset

Risk assets are investments that experience a significant amount of volatility in the usual course of the market.

Stocks, commodities, high-yield bonds, currencies—and Bitcoin—are risk assets because you can expect their prices to move up and down frequently under almost any market conditions.

Until recently, Bitcoin was considered a store of value that was somewhat immune to fluctuations in the value of risk assets. That’s no longer the case. Today, Bitcoin and the broader crypto market are influenced by economic phenomena that move the importance of risk assets like inflation, stock markets and Fed monetary policy.

“The reason that this particular decline is occurring this year is that market narratives have shifted from risk-on to risk-off,” said Richard Smith, author of the Risk Rituals Newsletter. “Liquidity is drying up as the Fed and other central banks start to taper excess stimulus.”

Experienced Bitcoin traders are no strangers to bear markets. The price of BTC fell more than 80% in the 2017-2018 period. But that was before major corporations, like Fidelity and PayPal, invested billions in getting into the crypto game.

Fledgling crypto owners should know how much nerve is required to stick with Bitcoin over time.

As of this writing, BTC is down 8.5% over the past five days. The original crypto is now at its lowest price point since July 13.

Ethereum, the leading altcoin, has fallen nearly 11% in the past five days. Ethereum has experienced even more turbulence than Bitcoin recently, with news emerging of bugs found in its anticipated network upgrade, commonly referred to as the Merge.

The Fed is expected to deliver the last of its big rate hikes during its September 20-21 meeting. Wall Street economists predict a 50 to 75 basis point (bps) increase.

Experts say the Fed has nearly no choice in the matter, as U.S. inflation has risen to levels not seen in over four decades. The Fed’s tightening of monetary policy is putting a damper on the easy cash that some crypto projects had become accustomed to.

The total cryptocurrency market capitalization now stands at less than $1 trillion, a far cry from its $3 trillion capitalization in November 2021.

Bitcoin Bottom

Before Bitcoin hit a few snags this month, the original crypto had been trading at nearly $25,000 on Aug. 14, a substantial improvement from its prices in June when Bitcoin found its bottom.

For those who need a refresher: Bitcoin bottomed at its 52-week low of $17,708 on June 18. The drop followed news of several crypto companies facing a liquidity crunch.

Several days before Bitcoin’s bottom, crypto lender Celsius paused customer withdrawals because of “extreme market conditions.” Celsius has kept customer withdrawals and transfers frozen since June 13. The crypto firm filed for chapter 11 bankruptcy protection on July 13 after a month of turmoil.

Adding to the pile of crypto firm insolvencies, it was reported around June 16-17 that Three Arrows Capital (3AC), a Singapore-based crypto hedge fund, was insolvent.

On June 27, Three Arrows Capital (3AC) defaulted on a loan from Voyager Digital; the loan was worth about $350 million in crypto assets and comprised of USD Coin (USDC) and roughly 15,250 BTC. For those needing the backstory, 3AC was a major backer of TerraUSD/LUNA, the epicenter of last month’s stablecoin meltdown.

The series of liquidations from crypto lenders such as BlockFi, Voyager and Celsius spelled disaster for 3AC, sending the firm into bankruptcy.

Bitcoin prices are now down nearly 58% year to date, trading well off their all-time highs of around $69,000 in November 2021. Experts also say that BTC is no longer viewed as an inflation hedge, trading in lockstep with equities, which are also in a downturn.

Celsius, a decentralized finance (DeFi) platform and one of the largest crypto lenders was a big source of negative Bitcoin market sentiment in mid-June.

With up to 1.7 million customers, Celsius earned a cult following in the crypto world by advertising that users could earn an annual percentage yield (APY) of up to 18% by depositing their crypto holdings on the company’s platform.

The company takes crypto deposits and loans them out to other investors and financial institutions in a process analogous to conventional bank lending. Users earn yield from the revenue Celsius generates from crypto borrowers.

The company had $11.8 billion worth of assets under management (AUM) as of May 17, down from more than $26 billion in October last year. In June, the company stopped disclosing its total AUM on its website.

Bitcoin Had a Rough Start to 2022

Bitcoin ended 2021 up nearly 70%. That’s a fantastic return for any asset class, let alone one without any tangible value or the full faith and credit of a national economy behind it.

Nevertheless, a 70% annual return represents a comedown for Bitcoin after gaining more than 300% in the lockdown-ravaged year of 2020.

In 2022, investors are in a risk-off mood, embracing “a general flight to safety across the board in most asset classes,” said Alex Reffett, co-founder of wealth management firm East Paces Group. “Collectively, investors have shown more interest in value-based investments and less in speculative stocks and alternative ‘store of value’ investments.”

The Fed is fighting a historic surge in inflation that rivals anything seen in the last four decades. Just how many hikes remain is unclear, but analysts expect the central bank to keep raising rates through the end of the year and into 2023. The fed funds rate could end the year at 3.5% or above by some estimates.

When the Fed raises interest rates, it lessens demands for more growth companies—like tech stocks—and speculative risk assets—like cryptocurrencies and Bitcoin.

Judging how much demand for crypto will remain with all the liquidity drying up is an open question

“We have no historical precedent for how Bitcoin and other cryptos might act if we enter a sustained period when central banks actively drain liquidity,” said Interactive Brokers’ chief strategist Steve Sosnick. “Those tend to be difficult times for investors, and riskier assets tend to underperform safer ones.”

Bitcoin Is a Risk Asset

Risk assets are investments that experience a significant amount of volatility in the usual course of the market.

Stocks, commodities, high-yield bonds, currencies—and Bitcoin—are risk assets because you can expect their prices to move up and down frequently under almost any market conditions.

Until recently, Bitcoin was considered a store of value that was somewhat immune to fluctuations in the value of risk assets. That’s no longer the case. Today, Bitcoin and the broader crypto market are influenced by economic phenomena that move the importance of risk assets like inflation, stock markets and Fed monetary policy.

“The reason that this particular decline is occurring this year is that market narratives have shifted from risk-on to risk-off,” said Richard Smith, author of the Risk Rituals Newsletter. “Liquidity is drying up as the Fed and other central banks start to taper excess stimulus.”

Experienced Bitcoin traders are no strangers to bear markets. The price of BTC fell more than 80% in the 2017-2018 period. But that was before major corporations, like Fidelity and PayPal, invested billions in getting into the crypto game.

Fledgling crypto owners should know how much nerve is required to stick with Bitcoin over time.