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Why is the crypto market down today?

Crypto Prices Keep Falling, But Why? This year’s market crash has turned most winning portfolios into net losers, and new investors are likely losing hope in Bitcoin (BTC).

Investors know that cryptocurrencies exhibit above-average volatility, but this year’s drawdown was extreme. After hitting an all-time stratospheric high of $69,400, bitcoin price collapsed to an unexpected yearly low of $17,600 over the next 11 months.

That’s a drop in value of almost 75%.

Ether (ETH), the largest altcoin by market cap, also saw an 82% correction as its price dropped from $4,800 to $900 in seven months.

Years of historical data shows that drawdowns in the 55% to 85% range after parabolic bull market rallies are the norm, but the factors weighing on crypto prices today are different than those that have triggered sell-offs in the past.

For now, investor sentiment remains weak as investors avoid risk and wait to see if the Federal Reserve’s current monetary policy will ease persistently high inflation in the United States. On Sept. 21, Fed Chair Jerome Powell announced a 0.75% rate hike, indicating that rate hikes would be of a similar magnitude until inflation gets closer to the central bank’s 2% target.

Let’s take a closer look at three reasons why crypto prices will continue to fall in 2022.

US Federal Reserve rate hikes

Rising interest rates increase the cost of borrowing for consumers and businesses. This has the effect of increasing the cost of running the business, the cost of goods and services, the cost of production, wages, and eventually the cost of just about everything.

High, irrepressible inflation is the main reason the Federal Reserve is raising interest rates. And since rate hikes began in March 2022, Bitcoin and the broader crypto market have been in a correction.

When monetary policy or metrics measuring the strength of the economy change, risky assets tend to signal earlier or move earlier than stocks. In 2021, the Fed began signaling its plans to eventually raise interest rates, and data shows bitcoin price correcting sharply through December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine, signaling what was in store for stock markets.

If inflation eases, the health of the economy improves, or the Fed begins to signal a turning point in its current monetary policies, risk assets like bitcoin and altcoins could be the “canaries in the coal mine” again, reflecting risk’s return-on mood of investors.

The ongoing threat of regulation

The cryptocurrency industry and regulators have a long history of not getting along either due to various misunderstandings or distrust of the actual use case of digital assets. Without a working framework for regulating the crypto sector, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and what exactly constitutes a legal payment system.

The lack of clarity on this matter is weighing on growth and innovation within the sector, and many analysts believe that cryptocurrency mainstreaming cannot take place until a more commonly agreed and understood body of legislation is enacted.

Risk assets are heavily influenced by investor sentiment, and this trend extends to bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations, or worst-case scenario, an outright ban, is impacting crypto prices on an almost monthly basis.

Scams and Ponzis triggered liquidations and shook investor confidence again

Scams, Ponzi schemes, and severe market volatility have also played significant roles in crypto prices crashing in 2022. Bad news and events that affect market liquidity tend to lead to disastrous results due to a lack of regulation, the youth of the cryptocurrency industry and the market is relatively small compared to the stock markets.

The implosion of Terra’s LUNA and Celsius networks and Three Arrows Capital’s (3AC) misuse of leverage and client funds have each been responsible for consecutive hits to asset prices in the crypto market. Bitcoin is currently the largest asset by market cap in the industry, and historically altcoin prices tend to follow the direction that BTC price is going.

As the Terra and LUNA ecosystem collapsed, bitcoin price corrected sharply due to multiple liquidations within Terra – and investor sentiment soured.

The same happened on an even larger scale when Voyager, 3AC and Celsius collapsed, erasing tens of billions of investor and protocol funds.

Related: Who moon? Probably Not Soon: Why Bitcoin Traders Should Embrace the Trend

What to expect for the rest of 2022-2023

The factors affecting falling prices in the crypto market are governed by Federal Reserve policy, which means that the Fed’s power to raise, suspend or lower interest rates will continue to have a direct impact on the Bitcoin price, will affect ETH price and altcoin prices.

In the meantime, investor risk appetite is likely to remain subdued, and would-be crypto traders might consider waiting for signs that US inflation has peaked and that the Federal Reserve is starting to use language suggestive of a indicates a political shift.