Fall of the cryptocurrency market: the influence of inflation, rising rates and the global crisis

A particularly tense macroeconomic context

It has not escaped anyone, the cryptocurrency market is in crisis. While the total capitalization of cryptocurrencies has been divided by three, the macroeconomic situation does not appear to help within a year.

First of all, the war in Ukraine continues and the situation threatens at any moment to get worse than it already is. The health crisis, not completely resolved, is also worrying.

On the other hand, the various central banks struggling to contain uncontrolled inflationwhich keeps the financial markets under pressure.

If a slight decline in this inflation was expected, the data released last Friday wiped out this hope. The consumer price index reached a rate of 8.6% in the United States and 8.1% in Europe in May.

These figures weigh on risky assets. The S&P 500, the benchmark for the American market, has already done so lost more than 22% from all-time highs of the month of January.

Figure 1: Price of the S&P 500 mini futures contract

Financial analyst Vincent Ganne, who speaks weekly on our YouTube channel and Monday through Friday on Grille-Pain, our private Discord group, commented on this situation in his latest video:

“It is therefore an asset category, which no longer benefits from what was called Tina at the time, there are no alternatives. Back when money was free, when rates were low […]. Now, interest rates are climbing vertically. […] Inflation is out of control, in the United States, in Europe, at 8%. The market had hope because inflation had slowed in the United States for a month and last Friday that hope was shattered. “

👉 To go further – Find our guide to dealing with the bear market

How did we get there?

It is not recent that central banks support growth with low interest rates. But the phenomenon took on disproportionate dimensions after the subprime mortgage crisis of 2008. The decision-makers then had the choice of letting the problem be solved naturally, at the risk of seeing countries and businesses fail, or resorting to a money printing policy.

This second option was chosen, leading to negative interest rates and fueling financial markets for years artificially created money.

Some organizations have therefore literally made money by borrowing. because they were paying off less than they borrowed. This money has been reinvested and, with a view to diversification, the institutions have partly turned to the cryptocurrency market, which has therefore also benefited from this monetary creation.

However, this process fuels inflation, but at a relatively acceptable level so far. However, the health crisis and the war in Ukraine are two triggers they put forth many sectors under pressure. The various shortcomings have allowed inflation to rise even more, highlighting the shortcomings of the monetary policies implemented so far.

Central banks are now backtracking and raising rates to counter this inflation. Now that the free money tap is closing, risk aversion is back among institutional investors.

Since cryptocurrencies are a particularly risky sector, it is therefore one of the first to be abandoned from these investors. Finding themselves at the bottom of the scale, prices then drop due to the effect of the communicating vessels.

This Wednesday, June 15, the market expects to third consecutive rise in key rates. It will then be interesting to observe the price reaction. Therefore, as long as inflation is not resisted and the geopolitical situation remains in tension, prices will not be able to rise permanently.

The cryptocurrency market facing this crisis

From last November’s highs, the price of Bitcoin (BTC) has almost lost 70% of its value.

Bitcoin price

Figure 2 – BTC price in the weekly chart

The king of cryptocurrencies therefore more or less defends the prices he had is the highest in 2018. It followed a drop of 85%. up to $ 3,000.

Although the Earth (LUNA) episode of last May did not help the situation, the graph in Figure 2 shows that prices did not wait for this to start to deteriorate. Instead, cryptocurrencies suffer from a exacerbated positive correlation with the stock market.

While Wall Street has come to support this latest bull run in the crypto ecosystem with its liquidity, the current crisis is creating a massive withdrawal of capital.

Altcoins are paying an even higher price, with devaluations on the rise sometimes around 90% from the previous one All the time high (ATH) as shown in the first 10 illustrations below:

Decrease from ATH

Figure 3: Percentage of Cryptocurrencies Decline From Their respective ATHs

The consequences of the crisis on the crypto ecosystem

If digital assets can qualify as a bulwark against inflation long term, the short-term shocks clearly show that this category does not yet have safe-haven status. This capital flight is not without consequences for the ecosystem.

The first visible impact of the bear market, beyond prices, it’s about layoffs. We regularly provide examples and will come back to them in more detail soon. But more insidious dangers await some actors.

The following tweet reports El Salvador’s BTC reserves, Microstrategy, Tesla and Block:

All I’m at a loss. From just 8% for Block to over 44% for El Salvador.

However, the latter does not appear to be officially worried about this. Alejandro Zelaya, the country’s finance minister, said that Bitcoin alone represents 0.5% of the national budget of El Salvador and commented on the situation in a reassuring tone:

“When they tell me that Bitcoin’s fiscal risk for El Salvador is high, the only thing I can do is smile.”

If, on the other hand, the price of BTC were to stabilize steadily below $ 21,000, MicroStrategy would in the face of a margin call on its secured bitcoin loan. And for good reason, with a $ 205 million loan, that means at least twice as much collateral. However, the price of Bitcoin is halved today from this operation, mechanically lowering this proportional guarantee.

The company will then have to strengthen this collateral or sell part of its position. The use of the latter solution would undeniably accentuate the fall. But it is the first option that CEO Michael Saylor wishes to favor thanks to 115.109 BTC ready to enter the reinforcement:

Finally, another point of tension concerns the centralized platforms that deliver performance, of which Celsius is a significant example. The latter has suspended the withdrawals to be addressed outflow of money many users. Indeed, this trend leads to friction due to funds sometimes blockedthus preventing full compliance with investor payments.

Celsius would send several tens to hundreds of millions of dollars from ETH and BTC to FTX, to free up liquidity and allow payments from its users:

In light of all these elements, if we do not have to deny that the crisis situation is critical, we nevertheless remember that the crypto ecosystem it’s here to last. Future-ready investment firms like a16z and its recent $ 4.5 billion fund to develop Web3 projects prove this.

Although it is appropriate to remain cautious, responsible and methodical, in the face of this situation, it should be remembered that the best business they are usually performed in times of uncertainty. However, we don’t have to rush headlong, bearing in mind that while this may be a good entry point, the decline may not be over.

👉 Also in the news – BlockFi dismisses 20% of its staff in the face of the market environment

Sources: CoinGecko, Bitcoin Price, S&P 500 Future Mini Contract Price, Reuters, Inflation

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About the author: Vincenzo Mayor


I timidly discovered the world of blockchain in late 2018 during my pursuit of financial freedom. Initially invested moderately, only two years later I decided to bet everything on the movement that was taking shape at the time. So I dedicate 2021 to train better to acquire more knowledge and seriousness. As I often like to say: I still have a billion things to learn. And what I know, I want to share it with you.
All articles by Vincent Maire.

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