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Last November, Bitcoin reached a new all-time high of $68,000 per coin, while Ethereum skyrocketed to $4,800. However, the rally was not destined to last in 2022. By the fall of 2022, the world’s most capitalized cryptocurrency has fallen in price three times compared to the November peaks and the ether – four times. The current collapse has already become one of the largest in the history of trading. What are the fundamental reasons for this crypto winter, and is crypto dead?
Why are cryptocurrencies getting cheaper?
Historically, the dynamics of the cryptocurrency market have often been outside the context of the traditional economy. The current crisis, on the contrary, has demonstrated its involvement in global processes. In the spring of 2020, when the WHO declared a COVID-19 pandemic, the stock and cryptocurrency markets reacted to the alarming news in the same way – with a fall. However, this process was stopped by the Fed, which launched a quantitative easing program. It was at this moment that the correlation of the two markets intensified, and the charts of cryptocurrencies and stock indices began to almost repeat each other.
Rate cuts and asset purchases have given banks access to cheap money and allowed them to lower the cost of borrowing for customers. The Fed’s example was followed by the regulators of the world’s largest economies.
The overabundance of available money flowing into the economy has flowed into the stock market and alternative investments.
What helped the collapse?
The collapse of cryptocurrencies was also helped by internal market events. One of the catalysts was the collapse of the stablecoin Terra (UST), which was one of the ten largest cryptocurrencies before the collapse, and its support token Luna. The UST case called into question the security of an unsecured algorithmic way to maintain parity against the dollar.
Another blow to the market was caused by the popular crypto bank Celsius, which suddenly suspended the withdrawal of customer funds in the spring, explaining this by “extreme market conditions”.
What will happen next?
Analysts and economists, speaking about cryptocurrency, traditionally give a more emotional forecast than for the stock market, based primarily on their fundamental belonging to the number of crypto-skeptics or crypto-enthusiasts. The former are always waiting for the Bitcoin crypto crash 2022, the latter predict a new record for it.
If we assume that the dynamics of the cryptocurrency market will continue to correlate with the stock market, then analysts do not yet make optimistic forecasts for the latter. The S&P 500 is expected to fall to 3,400 by the end of the year in a base case that does not assume a recession in the US. If it does come, then the index will drop to 3000 points. Top equities strategists say the bulls’ expectations will not come true before the end of the year: stock markets have collapsed, but they must fall even more to win back global downside risks in the US, China, and Europe.