Why Is Bitcoin Down Today?
By Benjamin Curry
June 13, 2022
The price of Bitcoin (BTC) has been dropping sharply, thanks to major turbulence in cryptocurrency markets.
As of writing, BTC has fallen below $23,000, down from approximately $28,000 on Sunday morning. This is a major break lower from the $28,000 to $32,000 range the benchmark crypto had been seeing since the stablecoin meltdown of early May.
The current bout of crypto volatility began with the worrying May U.S. consumer price index (CPI) report on Friday, which delivered another inflation shock to the global market.
Hotter inflation has raised expectations for the possibility of a bigger interest rate hike from the Federal Reserve, which begins a two-day policy meeting on June 14.
The elevated volatility over the weekend drove a popular crypto lending company called Celsius (CEL) to pause customer withdrawals, and that move sparked fears that contagion was ripping through markets.
Bitcoin prices are now down 50% year to date and are trading well off their all-time highs around $69,000 in November 2021.
Total cryptocurrency market capitalization fell below $1 trillion this morning for the first time since February 2021, according to data from CoinMarketCap.com.
Bitcoin Had a Rough Start to 2022
Bitcoin ended 2021 up nearly 70%. That’s a fantastic return for any asset class, let alone one without any tangible value or the full faith and credit of a national economy behind it.
Nevertheless, a 70% annual return represents something of a comedown for Bitcoin after gaining more than 300% in the lockdown-ravaged year of 2020.
In 2022, investors are in a risk-off mood, embracing “a general flight to safety across the board in most asset classes,” said Alex Reffett, co-founder of wealth management firm East Paces Group. “Collectively, investors have shown more interest in value-based investments and less in speculative stocks and alternative ‘store of value’ investments.”
One reason is the Federal Reserve, which has raised interest rates two times this year and is poised to raise them again this week.
The Fed is fighting a historic surge in inflation that rivals anything seen in the last four decades. Just how many hikes remain is unclear, but analysts expect the central bank to keep raising rates through the end of the year and into 2023. The fed funds rate could end the year at or above 3% by some estimates.
When the Fed raises interest rates, it lessens demands for more growth companies—like tech stocks—and speculative risk assets—like cryptocurrencies and Bitcoin.
Judging how much demand for crypto will remain with all the liquidity drying up is an open question.
“We have no historical precedent for how Bitcoin and other cryptos might act if we enter a sustained period when central banks actively drain liquidity,” said Interactive Brokers’ chief strategist Steve Sosnick. “Those tend to be difficult times for investors, and riskier assets tend to underperform safer ones.”