Why is crypto declining?

Over the past five months, it has confused investors by going pretty much nowhere, price-wise.

The Bitcoin price has been stuck around the $20,000 mark since early June, steadfastly refusing either to crash further or stage a meaningful recovery.

Investors do not expect the world’s number one cryptocurrency to flatline in this way. So, is Bitcoin dead or simply sleeping?

One year ago, on November 9, Bitcoin was on top of the world and trading at a record high of $66,938, having more than quadrupled in a year.

It has crashed this year along with almost everything else, as the war in Ukraine, post-coronavirus supply blockages and raging inflation destroy investor sentiment.

Bitcoin was a baby of the easy money era, during which central bankers and politicians lavished markets with endless monetary and fiscal stimulus to combat the global financial crisis and then Covid-19.

That era has come to an abrupt and painful close as the US Federal Reserve and others drain the market of liquidity to stamp out inflationary fires.

Cryptocurrency is far from the only asset class to take a beating. Shares, bonds and even gold have fallen while property looks like the next to suffer.

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The big surprise is that Bitcoin is uncharacteristically becalmed, while other asset classes are swept up in the world’s many political and economic storms.

Trading volumes have more than halved, says Matt Weller, global head of research at Forex.com and City Index.

“The BitVol gauge of volatility for Bitcoin has fallen sharply and at one point, its 30-day realised volatility dipped below the broader stock market,” Mr Weller says.

Jeremy Batstone-Carr, European strategist at advisers Raymond James, says that at one point during the recent UK gilts crisis, Bitcoin was actually “deemed less volatile than the entirety of the UK’s sovereign bond market”.

Let us first say what this does not mean. Bitcoin has not transformed itself into digital gold through some magical monetary alchemy.

Do not treat it as a safe haven in times of trouble, says Myron Jobson, senior personal finance campaigner at Interactive Investor.

“That notion was diminished by its painful start to the year, punishing anyone who saw it as a store of value,” he says.

Yet many investors could be intrigued and tempted by today’s stability. It feels as if Bitcoin is biding its time, waiting for circumstances to move in its favour.

Technology stocks have sold off again after a tough earnings season but cryptocurrencies have largely held their ground, says Simon Peters, cryptocurrency market analyst at social investing network eToro.

This is odd, given that the two asset classes have “correlated heavily” so far this year.

One theory is that the cryptocurrency crash has driven out the dabblers, with the proportion of wealth held in coins that moved in the past three months at a record low.

Wealth held by coins older than three months is now at a record high, Mr Peters says, quoting figures from Binance.

Long-term hold-on-for-dear-life (HODL) crypto investors have little incentive to sell at today’s low level, and are sitting tight.

“Whereas given stock market conditions and the negative forecasts from companies reporting earnings, there is perhaps a greater inclination to sell stocks,” he says.

Bitcoin is “stubbornly” clinging to $20,000 as volatility falls, selling slows and the price potentially “bottoms out”, says Sam Kopelman, UK country manager at global cryptocurrency exchange and wallet Luno.

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The “crypto winter” may be prolonged by global inflation, the looming recession and lack of confidence in the stock market, but is not expected to last forever.

“History shows that crypto does tend to recover after a sustained dip and investors have certainly not lost interest,” Mr Kopelman says.

There are early signs that institutional investors are edging back into riskier assets.

“Bitcoin is scarce and the cryptocurrency is limited to a quantity of 21 million, meaning it is somewhat protected from inflationary pressures.”

Investors may have to be patient, Mr Kopelman says.

“Long-term fearful sentiment in the market means that investor momentum will take a while to pick back up.”

Sentiment is still the main driver of cryptocurrency movements, as we saw during the summer’s bear market rally, when investors briefly kidded themselves that the Fed was set to take a more dovish stance. The S&P 500 briefly sparked into life. So did Bitcoin.

Investors called that wrong, and last week Fed chair Jerome Powell remained hawkish when raising the Fed funds rate by another 0.75 per cent.

Yet, the summer rally suggests that when interest rate increases finally peak and sentiment turns in a more positive direction in 2023, Bitcoin could benefit.

That prospect may tempt some investors to take a position in expectation of the next cryptocurrency summer, but market sentiment is not the only factor affecting its performance, Mr Kopelman says.

“Ultimately, confidence and regulatory clarity is key to crypto adoption and its resurgence,” he says.

Here, Bitcoin remains a mixed bag. Credit ratings agency Moody’s says that although this year’s cryptocurrency losses have largely been contained if leverage builds again, “it could eventually unsettle the banking system, even if banks continue distancing themselves from direct interaction with the crypto economy”.

So-called stablecoins still refuse to disclose their investments, despite growing regulatory pressure to do so.

“Liquidity risk management and other disclosures that have become commonplace for funds and banks remain lacking for digital asset service providers,” Moody’s says.

Yet, wider acceptance is growing, says Nick Root, chief executive of FinTech “toolkit” Intergiro.

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“In 2023, we expect to see a growing number of financial institutions accept cryptocurrency as a form of payment,” he says.

Mr Root notes that Mastercard recently said it is keen to start introducing plans to make cryptocurrency an “everyday way to pay”, while Google has announced a partnership with Coinbase, allowing customers to pay for some cloud services with cryptocurrency early next year.

“With huge firms such as Google jumping on board, in 2023, we predict more banks and financial providers will join them,” he says.

For now, investors are still in the “wait-and-see” phase, with traders saying that Bitcoin is unlikely to embark on a sustained recovery until it closes above, say, $22,500.

One thing has not changed. Any investment in cryptocurrency remains highly speculative as the end-user case remains unproved.

Speculation is out of fashion for now, as everybody runs for cover ahead of the recession.

The cryptocurrency world is in chaos.

Just months ago, crypto companies were advertising heavily during the Super Bowl after virtual currencies enjoyed a dizzying rally in 2021.

Today, Bitcoin and other cryptos are plunging, and companies such as Coinbase, which runs the largest crypto exchange in the U.S, are announcing layoffs.

"The crypto house is on fire, and everyone is just rushing to the exits because there is a complete loss of confidence in the space," says Ed Moya, a senior markets strategist at financial firm Oanda.

Here's what's going on.

Because they are being hit by the same factors impacting stocks and other assets.

Consumer prices are surging at the fastest annual pace in over four decades, and the Federal Reserve is hiking interest rates aggressively to bring down inflation.

On Thursday, the Fed raised rates by three-quarters of a percentage point and indicated it could raise them again by the same amount at its next meeting in July if needed to cool down prices.

Higher interest rates make borrowing costs more expensive for people and companies, and that's raising concerns about an economic recession.

Stocks have fallen dramatically from records set in January, with the broad S&P 500 index entering a bear market this week (when an index falls 20% or more from its recent high).

Cryptocurrencies have hardly been immune. Since Bitcoin hit an all-time high in November, the value of the world's most popular digital currency has fallen by about 70%, and its rivals are also suffering. Ether is down by around 70% this year, and so is Dogecoin.

Bitcoin's backers have always claimed the digital currency would be an "inflation hedge," but in fact, it hasn't behaved that way.

As shares of tech companies have plummeted, so has Bitcoin's value.

"What this episode, this crash in crypto prices, shows is that cryptocurrencies are by and large speculative financial assets that are subject to macroeconomic forces, such as changes in interest rates," says Eswar Prasad, an economics professor at Cornell University.

The sharp falls in cryptocurrencies are driving some companies into problems.

Celsius, which takes cryptocurrency deposits from individuals and lends them out, stopped withdrawals because it's facing financial trouble. Binance, a cryptocurrency exchange, halted Bitcoin withdrawals for several hours on Monday.

The problems at Celsius are undermining confidence in the broader cryptocurrency space just weeks after the collapse of a stablecoin called TerraUSD.

Crypto companies are responding by re-evaluating their plans for the future.

Coinbase, a cryptocurrency exchange platform, reduced its staff by almost a fifth.

In a memo to staff, the company's CEO said Coinbase "grew too quickly."

"We appear to be entering a recession," Brian Armstrong wrote.

Some backers of cryptocurrencies still believe a "crypto winter" could lead to a "crypto spring." In the past, deep downturns have led to strong rebounds.

But according to Moya, the analyst at Oanda, the economic landscape is different now, and so is crypto's outlook.

In fact, with the Fed continuing to raise interest rates aggressively and with inflation still high, there is likely to be more pain ahead across all markets, including cryptocurrencies.

It's been a rude awakening for the millions of people who bought cryptocurrencies, especially if they got into the craze last year.

Prasad says 2021 was "the height of crypto mania."

The total value of all the digital currencies in the world swelled to $3 trillion. Crypto companies inked sponsorship deals with professional sports teams, and Coinbase, Crypto.com, eToro, and FTX shelled out millions of dollars to buy ads during the Super Bowl.

Crypto.com hired actor Matt Damon as a spokesman, and an FTX ad featured the curmudgeonly comedian Larry David.

The message from these companies was that crypto represents the future of finance and it was best not to miss out.

"The technological razzle-dazzle of cryptocurrency swept in a lot of retail investors who didn't realize the sort of risks they were taking on," Prasad says.

Today, the total value of crypto market has been shaved to about $1 trillion. And if you bought Bitcoin on Feb. 14, the day after that Super Bowl ad bonanza, it is now worth about half of what you paid for it.

The increase in amateur investors, combined with the growing complexity of some of the cryptocurrency products, are worrying regulators.

Crypto markets are still fairly new, and there's a lack of clarity even about the most basic things, like who is in charge of overseeing the space.

Right now, both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) claim oversight of parts of the crypto market.

"If there is no guidance whatsoever, people will be taken advantage of, and we want to prevent that" says Cam Harvey, a finance professor at Duke University. "Right now, we have basically nothing."

The SEC is stepping up enforcement actions against crypto companies and considering new rules. Meanwhile, in an executive order, President Biden asked government agencies to make policy recommendations.

And in Congress, Sen. Cynthia Lummis (R-WY) has teamed up with Sen. Kirsten Gillibrand (D-NY), on the first comprehensive crypto legislation. The bill would give more regulatory authority to the Commodity Futures Trading Commission.

The price of bitcoin, the most popular cryptocurrency, dropped below $16,000 in November 2022, a year after it reached a record high of $69,000.

Things have started looking up in 2023 and it’s currently worth around $30,000, but the digital currency was on a downward trajectory throughout 2022. So what fuelled it?

In this article we explain:

Bitcoin is incredibly volatile. It is prone to rising and falling sharply on a daily basis. But it’s not the only cryptocurrency to have had a tumultuous time recently.

Global stocks have gone into a downturn as result of:

This has spilled over into the cryptocurrency market.

The slump in November 2022 was triggered by the collapse of FTX, which handled around $1 billion transactions each day. Its collapse is having a knock-on effect on other crypto exchanges.

In June 2022 bitcoin dropped below $20,000 for the first time since 2020. This was prompted by the decision of Celsius Network, a major US cryptocurrency lending company, to freeze withdrawals and transfers, citing “extreme” conditions.

The move fuelled a slump across the cryptocurrency market.

China’s continued crackdown on crypto is playing a part too.

In addition to this, there have been sudden and severe sell-offs of major cryptocurrencies. This has triggered panic and further sell-offs which has knocked consumer confidence.

But bitcoin has recovered some of the ground it lost last year and is now worth around $30,000.

Unlike traditional investments such as company shares, where price movements may well be influenced by the performance of the business, bitcoin has no underlying asset.

This means that the movements in its price are based purely on speculation among investors about whether it will rise or fall in future.

As a result, there can be violent swings in the price of bitcoin, even in the space of 24 hours.

At the moment, high inflation and a cost of living crisis are causing people to reduce their investment risk. This has led to people selling their cryptocurrency.

There have also been a number of incidents that have caused the price to fluctuate:

A number of negative stories and threats of further regulation have pushed the price of bitcoin down.

These include:

But there have been more positive stories and these have given the bitcoin price some protection over the past couple of years:

Other stories have been more mixed in terms of what they mean for cryptocurrencies. Among them has been the US Federal Reserve considering whether to launch its own “central bank digital currency” (CBDC).

In March this year, President Joe Biden issued an executive order that aims to co-ordinate the US government’s actions on the regulation of digital assets.

While many crypto fans think regulation is a bad thing, some think this new executive order could help with the development of digital assets, such as the CBDC, to ensure the right consumer protections are in place.

Read our article here if you are still wondering whether or not to invest in bitcoin.

In 2021 the price soared by more than 700% in 12 months to a record high of $69,000 in November.

It certainly seemed like bitcoin’s bubble has burst as investors have lost confidence in the crypto sector. It is uncertainty over the future of bitcoin which caused prices to crash in 2022.

In June 2022, it plummeted below $18,000. It was still below $20,000 by November 2022, just a year after its record high of $69,000.

While it’s now showing signs of recovery, it’s still a long way off from its record highs.

When assets rise very quickly in price and surge to a record high, typically this makes a crash much more likely – or at least a correction, which is when the price falls back down to a more “normal” level.

This appears to be the situation that bitcoin is in right now. It took the cryptocurrency:

A decisive year for crypto investors was 2013. Bitcoin’s price went from $13.40 at the start of the year to its height in December of $1,156.10, before falling to about $760 three days later.

Where it is heading next is equally unpredictable.

Check out one Times Money Mentor reader’s crypto experience: “Bitcoin’s rollercoaster ride has swept me to an £8,500 profit in less than a year”

There are no guarantees when it comes to investing, especially with cryptocurrency. As quickly as bitcoin falls, it could just as rapidly climb again.

There are a number of concerns about cryptocurrencies that are dampening its prospects:

Further regulation is seen as a threat to the decentralisation of crypto, which is having an impact on the prices of digital currencies.

Bitcoin’s fans point to its positive qualities:

Given its volatile nature, it is possible that bitcoin will gather momentum again at some point in the future (perhaps weeks, months or even years down the line, or perhaps not at all).

But no one has a crystal ball and the speculative nature of bitcoin makes it difficult to predict.

Find out more about the tips (and mistakes to avoid) when investing with cryptocurrencies.

Not necessarily. Supporters of bitcoin see it as a diversifier in balanced portfolios, but it did no better than stocks at the start of the coronavirus pandemic. This is because investors panic-sold everything.

In the first two weeks of March 2020, bitcoin went down by more than 40%.

“That was when we saw all equity markets take an aggressive leg down because of concerns about Covid-19,” notes Rosie Bullard, partner and portfolio manager at James Hambro & Partners. “So it wasn’t exactly a store of value in an equity market reversal.”

In addition, New York State Attorney General Letitia James filed suit on Thursday against crypto exchange KuCoin, arguing that certain coins traded on KuCoin should have been registered as securities.

Bitcoin (BTC) is down nearly 11% on the week, while Ethereum (ETH) is down more than 9%. Cardano (ADA), Polygon (MATIC) and Dogecoin (DOGE) are also seeing steep losses on the week. The crypto winter is far from over, it appears.

Silvergate announced on Wednesday that it would write off its assets and wind down its business due to rising U.S. interest rates. The bank continues to suffer from the collapse of its key client, FTX, in November 2022

Customers pulled more than $8 billion out of Silvergate’s coffers since the collapse of FTX in November 2022. In fact, the bank held a mere $4.6 billion in cash at the end of last year.

In recent weeks, other major crypto players like Coinbase, Galaxy Digital, Paxos and Circle have scrambled to distance themselves from Silvergate, driving the bank to close its Silvergate Exchange Network, a major crypto payment hub.

Shares of Silveragate had fallen nearly 90% year to date before the bank shut its doors.

In her lawsuit, New York State AG James argued that cryptocurrencies like Ethereum traded on KuCoin, should have been registered as securities. This suit is the first time that a U.S. regulator has claimed in court that ETH is a security.

Under the Martin Act, an anti-fraud law in New York State, the attorney general can bring civil and criminal charges against the exchange due to the fact that their prices are all dependent upon the efforts of others, such as ETH co-founder Vitalik Buterin.

The lawsuit echoes claims made by SEC Chair Gary Gensler, who has argued that Bitcoin is a security. If this theory is born out in court, it would place cryptocurrency regulation under the loving care of the SEC.

Gensler famously said in June 2022 that crypto exchanges that don’t cooperate with the SEC are “operating outside of the law” and may be at risk of enforcement action.

In an unfortunate choice of timing, the U.S. government moved more than $1 billion in Bitcoin to new wallet addresses at the same time that Silvergate was melting down, including one owned by crypto exchange Coinbase.

This led to crypto traders fearing that the U.S. government might be poised to release a portion of this confiscated Bitcoin onto the open market.

Although that action wouldn’t follow past precedents set by the government’s handling of digital assets, the fears of a supply glut haven’t stopped Bitcoin’s price from tumbling in recent days.

When buying the dip, crypto investors should proceed with extreme caution.