The crypto market, spearheaded by Bitcoin (BTC) and Ethereum (ETH), faced another major sell-off this week, with the world’s largest cryptocurrency dropping a further 8%, seeing it lose above a quarter of its value this month alone.
There are 5 main reasons why Bitcoin is crashing and why it’s happening. Let’s check it out below.
Inflation and Interest Rates
The drop in the crypto market has come shortly after the global stock market marked a rocky start to the year. Bitcoin has reached its highest correlation since the stops since September 2020. This is why when the stock market heads south as we’ve seen at the beginning of 2022, so does Bitcoin.
Cryptocurrencies are sensitive to global policy changes and they no longer behave like an isolated risk asset. The Fed will increase interest rates potentially even by March in an attempt to actually discourage businesses but also individuals from borrowing. As a result, the attempt to slow down the economy and lift rates will make borrowing more and more expensive, and this should have a damping effect on inflation.
Russian Crypto Ban
The second issue is Russia’s crypto ban one of the biggest triggers of the sell-off last week. The central bank of Russia suggested banning the act of crypto mining and also any use of cryptocurrencies within the country and this was a threat to not only financial stability, citizens’ well-being, but also the sovereignty of monetary policy.
Russia’s central bank actually introductions of mechanisms to block exchanges of cryptocurrencies with fiat currencies and prevent financial institutions from carrying out any such transactions including crypto exchanges.
Geopolitical Instability
The next reason is due to geopolitical instability. Kazakhstan’s internet access was severed during a political uprising. This had a huge impact on the country’s rapidly growing crypto mining operations. This is important because Kazakhstan was the second most important hub for Bitcoin mining after the US.
This happened after China enforced strict bans for crypto miners in communist countries to illustrate the growth rate in Kazakhstan. There’s data from the financial times and they state that back in April 2021, Kazakhstan accounted for 8% of Bitcoin’s hash rate.
We’ve had more tension between Ukraine and also Western countries and this has also had an impact on the Bitcoin price.
Correlation with Nasdaq
The next reason is the correlation with Nasdaq. Correlation between Bitcoin and equities reached its record high back in November and Bitcoin has fallen at a similar rate to the Nasdaq index. The Nasdaq index is mainly compromised of tech and growth stocks. Nasdaq has lost over 10 percent since its own high in November.
The correction for the index while a 10% drop might be bad news for Nasdaq investors. Bitcoin is of course far more volatile and while there’s no definition of what correction is it’s lost 80% previously and still managed to rebound to new highs in previous Bitcoin cycles.
Bitcoin Futures Selloff
The last reason is Bitcoin Futures sell-off. This is the most recent crash and in response the most recent sell-off. After a very successful year, Bitcoin was bound to attract large groups of people and many pour their money into Bitcoin Future ETFs.
But the drop last Friday on January the 21st liquidated over 1.1 billion dollars in crypto futures. Almost 300,000 traders had positions closed in the 24 hour period before Friday’s bottom, according to CoinGlass.
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