Last week was a trying period for the cryptocurrency market in more ways than one. The process of a bearish sharp turn in the price of bitcoin, ethereum, and many other cryptocurrencies was shadowed by the drop of the hash rate in the biggest proof-of-work networks. That was due to the bloody mayhem that was taking place in Kazakhstan, where the government quickly disintegrated under the pressure of a popular uprising. The same uprising escalated into a state of civil war with dozens of killed, which included a total shutdown of the internet. That is why many across the world learned last week that the same country is the second-largest producer of crypto computing power in the world.
However, this was not the direct reason for the sudden drop in prices, as a weak supply of tokens usually triggers a buying pressure, not a selling frenzy. However, the decisions of the US Federal Reserve from its December meeting did hit not just the crypto domain but the wider space of investment and finance. Now, there is a strong feeling of a persistent downturn in the crypto markets and also one that might be longer lasting than any similar drops in the past couple of years. Throughout all of this, the explosion of infections caused by the omicron COVID-19 strain is persisting as well. From the present perspective, a cautious pessimism about the state of the crypto market seems to be the order of the day.
The selloff of cryptocurrencies in the recent bearish turn began last Thursday. Over the course of the day, bitcoin and other digital assets fell drastically, even though not catastrophically as they did for example during the March 2020 crash. On that day, bitcoin reached 43,000 USD, which brought it down by 2 percent in the 24 hour period. It sank even lower, hitting its smallest value in over a month. Other digital currencies did not fare any better.
ETH dropped over 5 percent and hit 3,400 and solana tokens lost over 3 percent as well. That was also very worrying for traders and investors active in the crypto domain that focuses more on alternative tokens. Like in esports and similar domains, many are always looking for some fresh new tech advancement that might turn into a massive profit generator. In a previous couple of months, solana was that thing and it often did not simply follow the lead of the bigger tokens. Last week, it did precisely that, adding fuel to the bearish concerns.
Similar to a range of other drastic falls in price value in the crypto domain, this time around the US Federal Reserve was once again in the thick of it. While it is always difficult to assign blame and direct correlations between events in cryptocurrency market movements, this time around the FED can be easily implicated. In its December meeting, the central bank indicated that it plans to dial back a generally supportive monetary policy.
That will include a reduction in the number of bonds the FED holds. Besides, the central bank indicated that it plans to raise interest rates sooner than many analysts expected. At the same time, other macro-financial indicators were also problematic last week. These saw the benchmark 10-year Treasury yield move above 1.7 percent roughly in the same period. The cumulative effect of these developments pushed the price of BTC token down and did it in a drastic manner.
Tech Stock and Growth Assets
Technological stocks, as well as growth assets in general, tend to take a hit when rates go up, mainly because future earnings become less appealing to investors when yields go higher. The same process applies to cryptocurrencies, even though many of these are not an official part of the investment landscape that traditional banks and stock markets comprise. But, regardless of this, these assets are still seen in the high-risk category and that impacts them nonetheless in a very similar manner.
So, they share the fate of other assets, including those that comprise some cutting-edge technological elements. The upside to this connection is that when the environment for the riskier assets becomes more positive, the crypto markets see an improvement in price value and market capitalization as well. However, from the present vantage point, that is likely not going to happen in the near future, meaning that the crypto market can expect a prolonged bearish period.
Analysts agree that the markets saw a drastic weakening in the light of the FED moves in regards to the interest rates. That makes last week’s drop correlated in a pretty straightforward fashion. Of course, the bigger problem for the crypto market is that all of this comes in a period that already saw soft markets regardless. Bitcoin has been struggling throughout December, just like ethereum and many other digital currencies. Now, big support seems to be in the 40,000 USD range. That is what traders and investors are trying to gauge and decide whether or not it will hold in January.
If not, the space below is going to be explored next, which would mean that bitcoin would be at its weakest in nearly a year. Most indicators at the present moment are showing that the path of least resistance lies towards 35,000 USD or less. What is more, the volume of all trades, both inflow, and outflow, remains relatively weak, showing that there is not much interest in buying the dip. Also, there is a huge global issue of the ongoing pandemic and the omicron strain that keeps filling up testing centers across the world. The US and much of Europe are already in the grips of the ongoing wave and that spells economic issues. With them on the table, the process of any market recovery that increases the appetite for risky assets seems low. That is why some pessimistic prognosis seems to be most valid at the present moment – the crypto market might have to wait until springtime for some bigger recovery steps.