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Why bitcoin has fallen 70% from its highs and why it could fall further

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The cryptocurrency market is going through turbulent times. The rise in interest rates caused by inflation, fears that a recession is brewing in the US, along with the fall of some of the major platforms or crypto-asset funds have paid for the decline. Bitcoin was trading at $67,734 on November 9, 2021. Eight months later, it’s trading around $20,000, the lowest since December 2020, according to data from Bloomberg. Expect a 70% drop. And it leaves the market split between the bafflement of some and the warning (“I already said that”) of others.

The drop isn’t just affecting bitcoin. Ether is trading around $1,000 when it traded above $4,600 in November, down 75%.

The risk of recession in the world’s largest economy is the main reason behind the weakness of crypto assets. With the recovery still weak, the US Federal Reserve has decided to fight rampant inflation with aggressive rate hikes (from 0.75 a week ago and more hikes are expected at the July meeting). Cryptocurrencies have been moving in the same direction as the stock market for months: investors’ appetite for risky assets is waning and the search for safety is penalizing stocks and cryptos relative to bonds.

Venture capital fund Three Arrows Capital (3AC) has joined the list of negative news in the cryptocurrency market, revealing multimillion-dollar losses. The fall in the price of cryptocurrencies, which are very often used as collateral for loans or as a counterpart in token issuance, has caused disruptions to redemptions and companies such as BlockFi, Celsius or Terra/Luna. “Macroeconomic conditions must improve and the Fed’s strategy of aggressive rate hikes must be halted before the cryptocurrency market bottoms,” analyst firm Glassnode told Bloomberg.

Analysts also add technical reasons to the underlying causes that may amplify the declines: the risk is for Bitcoin to stabilize below $20,000 and that implies an avalanche of position closures by investors betting on the gains. “In general, the critical support levels in Bitcoin and Ethereum are of concern as investor sentiment does not support a strong recovery from these levels,” they state from XTB. It’s what experts have dubbed “crypto winter”: There’s still a lot of pessimism out there, and until sentiment improves, the cascade of falls may continue.

It’s not all bad news in a still developing market. “Blockchain technology and cryptocurrencies in particular are the new technological revolution and they will remain,” they say from Activotrade. “However, the solvency problems of several cryptocurrency hedge funds and lenders have damaged investor confidence and fueled the flight of crypto assets.”

The return made in cryptocurrencies since before the Covid pandemic is still very positive. Bitcoin is up 127% since March 2020 and Ethereum is up more than 500%.

The bad moment of some platforms

  • Celsius. The difficulties some crypto asset firms are going through have taken a toll on investor sentiment. A few days ago, Celsius asked users for more time to stabilize liquidity and operations, paralyzing their customers’ cash withdrawals. Celsius has enjoyed great popularity since its launch four years ago and has grown to more than $10 billion in assets under management, according to Activotrade.
  • blockfi. Another case is that of BlockFi, which is also proposing to suspend withdrawals of funds. The cryptocurrency lending platform announced Tuesday that it has received a $250 million support facility from crypto asset firm FTX to bolster its balance sheet.
  • 3AC. After several days of rumours, cryptocurrency hedge fund Three Arrows Capital (3AC) confirmed that it has suffered heavy losses on leveraged long positions. As of April, Three Arrows Capital had more than $3 billion in assets under management. The founders consider various options to save the company.
  • risks. These recent examples “highlight the leverage that some companies look to for profitability and that’s when the risks, like in previous crises, come because of the leverage,” they say from Activotrade.

Source elpais.com

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