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Krypto currency market has recently experienced a significant decline, with a total market value dropping by 10% between August 14th and August 23rd, reaching its lowest point in over two months at $1.04 trillion. This movement triggered significant liquidations in futures contracts, making it the largest since the collapse of FTX in November 2022.
Reasons for the Decline in Cryptocurrencies!
Various economic factors contributed to this decline. The increase in interest rates above 5% and inflation remaining above the targeted 2% led to higher financing costs for both households and businesses, putting pressure on consumer spending and economic growth. This situation can result in less money being used for savings and can force people to give up their investments just to cover monthly bills.
Expectations for inflation in 2024 are at 3.6%, and average hourly earnings have increased by 5.5% compared to the same period last year, leading to the belief that the Fed will maintain or even increase interest rates in the coming months. As a result, the high-interest rate scenario favors fixed-income investments, which are detrimental to cryptocurrencies.
While inflation has dropped from its peak of 9% to the current 3%, the S&P 500 index is only 9% below its all-time high. This could indicate a “soft landing” regulated by the Federal Reserve. In this case, it is argued that the possibility of a long and deep recession has decreased and that Bitcoin has temporarily undermined its investment thesis as a hedge.
Impact of ETFs on BTC!
Investors had high expectations for the approval of a Bitcoin exchange-traded fund (ETF), especially with the heavy support of BlackRock and Fidelity. However, these hopes were dashed as the SEC continued to postpone its decision, citing concerns that sufficient measures would not be taken against manipulation. The continued significant trading on unregulated offshore exchanges based on stablecoins could further complicate matters and raise questions about the legitimacy of market activities.
Financial difficulties within the Digital Currency Group (DCG) also had a negative impact. A subsidiary of DCG is struggling with over $1.2 billion in debt to the Gemini exchange. Additionally, Genesis Global Trading, Terra, and losses resulting from the collapse of FTX recently filed for bankruptcy. This instability could lead to forced selling positions in GBTC funds if DCG fails to fulfill its obligations.
Tightening regulations are further exacerbating the market’s troubles. The Securities and Exchange Commission (SEC) has made a series of allegations against Binance and its CEO Changpeng “CZ” Zhao, accusing them of misleading practices and operating an unregistered exchange. Similarly, Coinbase is facing regulatory scrutiny and is involved in a lawsuit focused on classifying certain cryptocurrencies as securities, highlighting the uncertainty in US securities policy.
