$1.4 trillion evaporates. What’s happening with the crypto crash?

Bitcoin, Ethereum and the major altcoins are selling off with risk assets.

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A bitcoin trader looks afraid and holds his hands to his mouth among graphics of red arrows pointing down

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Key points

  • The crypto market is down $1.4 trillion from its peak
  • Bitcoin and Ethereum are trading like risk assets
  • Higher interest rate prospects have investors seeking havens

Crypto investors aren’t having the best start to the New Year.

To say the least.

Since the height of the crypto market in November last year, when both Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) hit new all-time highs, more than US$1 trillion (AU$1.38 trillion) has been wiped from the global cryptocurrency market cap. That currently stands at around US$2 trillion.

And 2022 has been a shocker.

According to data from CoinMarketCap, 98 of the top 100 cryptos are down for the calendar year. The 2 that are flashing green are both US dollar-linked stable coins. And their fractional gains (both up some 0.05%) are hardly anything to write home about.

While Bitcoin has edged up 1.4% over the past 24 hours to US$35,467, the world’s original crypto remains down 48% from its 10 November record high of US$ 68,790. And it’s down 26% so far in 2022.

What’s happening with the crypto crash?

Crypto investors are being caught up in the wider selloff of risk assets.

The selloff is largely being driven by increased certainty that major central banks around the world will be raising interest rates sooner, and more aggressively, than most analysts had forecast last year.

Crypto assets are also facing new headwinds from looming government regulations in the United States and a potential ban in Russia.

Commenting on the risk asset nature of cryptos, Starkiller Capital’s Leigh Drogen said (as quoted by Bloomberg):

It’s even more of a risk asset now that most of the crypto market cap is Ethereum, Solana and all sorts of other stuff that is just basically technology where we’re pulling forward massive assumptions of global growth into the present.

Stephane Ouellette, CEO of crypto-platform FRNT Financial, points to the strong correlation between Bitcoin and altcoin prices and risk assets being hammered across the world:

Crypto is reacting to the same kind of dynamics that are weighing on risk assets globally. Unfortunately for some of the mature projects like BTC, there is so much cross-correlation within the crypto asset class it’s almost a certainty that it falls, at least temporarily in a broader alt-coin valuation contraction.

Hayden Hughes, CEO at Alpha Impact, explained why crypto is facing additional pressure in the current market selloff:

Margin positions being liquidated caused a wave of additional sell pressure, as assets that had been held as collateral were forcibly sold to pay for margin loans. I would expect it to take some time for a bottom to form and for confidence to return, before expecting any sort of bullishness.

The outlook for Bitcoin

The future price moves for the crypto market remain uncertain. As we looked at above, Bitcoin, Ethereum and most altcoins’ prices are closely tied to those of global risk assets, which in turn are closely tied to central bank interest rates and the cost of money.

As for Bitcoin, Antoni Trenchev, managing partner at Nexo, said (quoted by Bloomberg), “Fear and unease among investors is palpable. If we see a bigger selloff in equities, expect the Fed to verbally intervene to calm nerves and that’s when Bitcoin and other cryptos will bounce.”

Looking at the technicals, Trenchev added:

For now, Bitcoin is up against the wall after falling below $40,000 [US dollars]. A swift bounce above that key technical and psychological level can’t be ruled out. Failing a quick reversal, I’m not excluding Bitcoin re-tests $30,000 before the Fed changes tack, but that ought to be the bottom, at least in the mid-term. And from there, I think we can have a nice leg up.

There you have it. If you’re investing in crypto, you’ll want to keep an eye on the US Fed.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Bitcoin and Ethereum. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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