Prices of leading cryptocurrencies, including Bitcoin (BTC +2.08%), Ethereum (ETH +1.81%), Solana (SOL +0.70%), and Cardano (CRYPTO: ADA), are down more than 10% in the last week and some have fallen 20% or more from their highs.
Unlike a company with a management team and financial figures, getting to the bottom of why crypto prices are moving sharply to the upside or downside takes a little more digging. Here are five reasons why crypto prices are moving lower -- and what to do about it.
Image source: Getty Images.
1. The infrastructure bill
President Biden signed the $1 trillion bipartisan infrastructure bill into law on Monday. Certain crypto-related provisions offer some of the ways the Administration hopes to bolster tax revenue to fund both this bill and the proposed $1.75 trillion Build Back Better plan. The bill's loose definition of what exactly it means to be a crypto broker also encompasses small and large miners and other individuals or entities that aren't exactly brokers in the traditional sense. This issue circles back to regulatory fears of the U.S. government cracking down on the industry, making it less profitable and just more of a hassle overall.
There's also a provision related to transactions of $10,000 or more where social security numbers must be verified and the transaction reported to the government. This is yet another deterrent challenging decentralized finance and the crypto market overall.
Bitcoin Price data by YCharts
2. China cracking down on mining
On Tuesday, news came in that China's National Development and Reform Commission is continuing its pursuit of a crypto crackdown. The lion's share of crypto mining currently comes from China, where crypto is seen as a direct threat to the country's fiat currency and economy. The second-largest economy's negative stance on crypto isn't exactly a positive sign for the market.
3. A strengthening U.S. dollar
On Nov. 10, Bitcoin and Ethereum both reached all-time highs of $69,000 and over $4,800, respectively. The same day, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 6.2% over the last 12 months, representing the highest yearly increase in three decades. Since then, the dollar has been showing some strength thanks to higher-than-expected American spending across the retail sector. A stronger dollar means less inflation, which reduces the argument to invest in inflation-resistant asset classes.
Gold and high-yield dividend stocks have long been great ways to combat inflation. But cryptocurrency, especially Bitcoin, also has inflation-resistant characteristics due to a fixed maximum supply and independence from any one economy. If inflation starts heading in the other direction, then it would be a great thing for stocks and the U.S. economy, but a bad thing for crypto.
4. Liquidating leveraged accounts
Riddled with speculation, the crypto market is also home to a lot of borrowed funds. Using margin magnifies potential gains and losses. Companies like BlockFi and Coinbase are willing to pay their users high interest rates for holding stablecoins, big-cap cryptos, and even altcoins on their platforms because they can lend out those same assets for a higher interest rate and make money on the spread. However, when prices crash and investors lack the equity to keep their accounts solvent, then the broker can forcibly issue a margin call. If the user can't add new funds into the account to bolster their equity, they may need to sell crypto at lower prices to raise cash to cover the deficit.
In the last 24 hours alone, $609 million were liquidated from over 147,600 traders, which is an average of over $4,100 per trader. That's a lot of money, gone in a hurry. Although the crypto market is still up a lot year-to-date, there have been many occurrences where liquidations caused steep sell-offs, including in the May crash which spilled into a June sell-off, and even the brief pullback in September. Simply put, the widespread use of debt by crypto traders adds fuel to the fire of a crash, but can also accelerate a boom on the upside.
5. The possibility of a crypto winter
The crypto market is no stranger to volatility. But few phrases evoke more fear than the threat of impending crypto winter.
Crypto winters are basically prolonged periods of stagnating or declining crypto prices. In the past, they've come one and a half to two years after a Bitcoin "halving." A Bitcoin halving is when the reward per block mined is cut in half. They occur roughly every four years. Given that the last halving was in May 2020, many predict that a crypto winter will set in sometime within the next six months. However, the reward per blocked mined is much less than it used to be, and nearly 90% of Bitcoin's supply is already in circulation. Given this backdrop, halvings should have less impact over time.
Quite honestly, it doesn't make sense for Bitcoin and other crypto prices to go through a fairly predictable cycle of bullish and bearish years as they did in the past. But because it happened the last few halvings, and there's widespread consensus that it could happen again, we could very well see a situation of "sell the rumor, buy the news."
What to do now
The five reasons above all have one thing in common -- they are short-term challenges. The reality is that the long-term thesis for investing in top-tier cryptos like Bitcoin and Ethereum, or even high growth alternatives like Solana and Cardano, hasn't changed one bit.
Investing in cryptocurrencies requires a great deal of patience and risk tolerance. So far, the reward has been absolutely worth it. And given the rise of decentralized finance and more exciting projects in the crypto space, there's every reason to believe that crypto remains a great long-term investment even if we are approaching another crypto winter.
