The Crypto Crash Continues; why has bitcoin fallen 55% in the last 6 months?

Bitcoin is at its lowest level since July 2021.

The BTCUSD cryptocurrency,
+3.62%
plunged nearly 12% on Monday to below $30,000, down more than 50% from its all-time high in November, according to data from CoinDesk.

Why?

Some analysts attributed the reservoir to macroeconomic uncertainty. Investors are selling off risky assets as inflation rises at the fastest rate in 40 years, US economic growth slows and the Federal Reserve tightens monetary policy, while the Russia-Ukraine war and the problems of supply persist.

Although some bitcoin proponents have touted it as a store of value and a hedge against inflation, it has been trading as a risky asset for the past few months.

“The type of market participants that have come in over the past few years are largely these traditional macro-trading funds. They trade bitcoin like they trade tech stocks, although many aspects of bitcoin are inherently considered risky by crypto-natives,” Will Clemente, chief analyst at bitcoin mining firm Blockware Solutions, told MarketWatch in a statement. interview.

“Bitcoin’s correlation to traditional markets has been kind of in the driver’s seat lately,” Clemente added. The rolling 30-day correlation between bitcoin and the tech-focused Nasdaq 100 NDX,
-3.98%
hit an all-time high of around 0.8 on Monday, according to crypto data provider Kaiko Research.

The market currently views bitcoin and Nasdaq as “risky, long-lived, interest rate-sensitive assets,” Brent Donnelly, president of Spectra Markets, wrote in notes on Monday.

“If the Fed is injecting gas into the markets in the form of quantitative easing, that’s bullish. If they douse the fire as they go from arsonist to firefighter, that’s bearish,” Donnelly wrote.

Since March, the Fed has kept its balance sheet stable at nearly $9 trillion by reinvesting proceeds from maturing securities. The central bank said last Wednesday that it would reduce the size of its balance sheet by $47.5 billion a month for three months starting in June and increase by up to $95 billion a month starting in September.

Jay Hatfield, chief investment officer at Infrastructure Capital Management, attributed bitcoin’s strong performance in 2020 and 2021 in part to the Fed’s quantitative easing policy. “We had an unprecedented increase in liquidity from the Fed, buying $120 billion a month of securities. And now we will have an erratic shift toward a $95 billion per month cash cut,” Hatfield said.

“Year-to-date, bitcoin has held up relatively well against some of its equity-linked proxies, but once we broke $38,000, a large chunk of holders were underwater, creating a selling pressure,” said Martha Reyes, head of research at the crypto exchange. Bequant told MarketWatch via email.

Investors are also concerned that TerraUSD, an algorithmic dollar-pegged stablecoin, fell below $1 on Monday. The cryptocurrency, which is designed to trade at $1, traded at 69 cents on Binance on Monday night.

Terra ecosystem backers have voted to issue $1.5 billion in loans, half in bitcoin, to back the cryptocurrency. Do Kwon, founder of Terraform Labs, which powers the blockchain, earlier pledged to buy up to $10 billion in bitcoins to back the stablecoin.

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