Bitcoin has fallen nearly 30% in the past month alone as cryptocurrencies across the board tumble to their lowest levels in months.
Bitcoin dropped to just above $25,000 on Thursday, a more than 63% decline from its peak of $69,000 registered last November. The tumble comes as the Federal Reserve has begun tightening monetary policy and traditional assets like stocks also fall, fueling fears of a possible recession.
Ethereum, the second-largest cryptocurrency by market cap, fell to about $1,700 on Thursday before climbing back a bit. The drop represents a 26% plunge over the past week and a 36% loss for the month.
Ripple’s Thursday trough was $0.35, and Cardano’s was $0.40, with monthly losses of 46.5% and 49%, respectively. Steller, another major cryptocurrency, plunged to $0.10 and has lost nearly 80% of its value over the past year.
BITCOIN FALLS TO HALF ITS PEAK VALUE ALONGSIDE STOCK MARKET DROP
There are several factors at play in digital assets' plummet.
A major influence on the losses relates to the global economic situation more generally. After nearly two years of loose monetary policy, some central banks, particularly the U.S. Federal Reserve, have begun tightening by raising interest rates and shrinking balance sheets in order to drive down red-hot inflation.
Because raising interest rates is meant to slow spending, a side effect is that stocks have started to decline and fears of a recession have begun to percolate.
In downturns, investors typically flee risky investments in favor of safer and more stable stores of value. Bitcoin and other cryptocurrencies are still a new asset class, and those who have invested in the coins have been selling off their holdings for fear that they will crash, resulting in a chain reaction effect.
Bitcoin, and cryptocurrencies writ large, have become increasingly more mainstream and accepted by institutional investors. Goldman Sachs became the first major U.S. bank to trade cryptocurrencies over the counter, and Ray Dalio’s Bridgewater Associates has said it plans to back its first crypto fund.
With the growing ties to financial institutions, the cryptocurrency market has tacked closer to the gains and losses in the traditional stock market.
The Dow Jones Industrial Index has fallen by 8.2% over the past month, while the S&P 500 has lost 11.2% of its value, and the Nasdaq has cratered by 16.7%.
“There is pandemonium across all markets. Inflation is rising, interest rates are rising, and the actual effects at the consumer level are even much more dramatic than the Fed or government want to acknowledge,” cryptocurrency entrepreneur Travis Bott told the Washington Examiner.
Another factor sowing disarray in the cryptocurrency markets is the crash of stablecoin protocol Terra.
Stablecoins typically have their value tied to another asset class, such as gold or fiat currency, and aren’t supposed to fluctuate as wildly in value as other cryptocurrencies, like Bitcoin, because they are asset-backed.
The coin in question, TerraUSD, is an “algorithmic” stablecoin, which is reinforced by code rather than cash. It is meant to be tethered in value at right around $1, but this week, it dropped to as low as $0.26. The drop has caused anxiety among stablecoin investors, considering stablecoins comprise about 13% of the entire cryptocurrency market capitalization.
Some investors have seen cryptocurrency as a good hedge against inflation. Consumer prices have increased by a massive 8.3% over the past year, and many have bought Bitcoin as inflation soars.
Bitcoin Policy Institute’s Matthew Pines explained that some people misinterpret cryptocurrency as a hedge against inflation of the dollar because Bitcoin itself has non-inflationary characteristics.
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“The issuance of new Bitcoin is capped, and so that is an inherently non-inflationary monetary policy, and sometimes, that gets conflated with this idea of [it] being a market inflation hedge with respect to, sort of, the global dollar-based system,” Pines told the Washington Examiner.