Bitcoin had a rough weekend as the flagship cryptocurrency suffered a considerable drop in price on Saturday, plummeting from $53,000 to a low of $42,000, the lowest it’s been since October. The digital asset has since regained some ground, though, and was standing at just under $50,000 as of Sunday morning.
This drop reflects a market-wide dip: Popular non-fungible token (NFT) hosting blockchain Ethereum’s token fell from $4,600 to $3,800, while other tokens fell as much as 20% in value.
Analyst and veteran trader Ilan Tennenbaum cited the correlation between the crypto market and the US stock market as a potential explanation for the drastic movement: Last week US Federal Reserve Chairman Jerome Powell suggested that if inflation continues to rise at its current rate, the Fed might be required to raise interest rates in 2022, earlier than previously expected.
“When interest rates are low around the world and people don’t have where to put their money, they put their assets in the stock and crypto markets,” said Tennenbaum. He suggested that the rapid crypto liquidation reflects a safeguard against the Federal Reserve’s plans to increase interest.
“High rates are good for the US Dollar and bad for high-risk assets like stocks and cryptocurrency”.
Additionally, high amounts of leverage may be partly to blame.
“Every time that leverage goes too high, the market tends to crash very very quickly, to liquidate that leverage. Then it can go up again,” said Tennenbaum. “What we saw yesterday is that around $2.5 billion were liquidated [mostly long positions], and now the market can go up again.”
“The good projects will still be here in the years to come,” said Tennenbaum, comparing this kind of market-wide fluctuation to the dotcom bubble in the mid 2000s. “Ninety percent of those companies are not with us anymore, but the companies that did make it are Facebook, Ebay, Google; companies like that. It’s the same thing in the crypto market: We’re going to see a lot of projects disappearing, but the quality ones are going to be here for years to come.”
Cryptocurrency as a whole is currently on the road to recognition by the Securities and Exchange Commission, which hopes to enact some form of regulation on decentralized currency; and though that process has been an arduous one, the upshot seems positive.
“The regulation that’s coming in 2022 is going to be very good for the market,” said Tennenbaum. “In the short term, it can create volatility, it can crash the market; but when looking at the long term, let’s say five-six years from now, it’s definitely a good thing.”
Igneus Terrenus, head of communications at Bybit, said the price fluctuation was a market correction.
“This is the first major correction of the year that is not triggered by some FUD [fear, uncertainty and doubt] or tweet, and goes to show that the market will need more time for consolidation before it can test new highs,” Terrenus said. “Both bulls and bears must be fairly exhausted by a full year of roller-coaster rides. But who is buying and who is selling when the market ranges will leave clues as to where things will go after the holiday season.”