But when things are at their lowest, the only place left for them to go is up. Does this apply to cryptocurrencies? Are we due for a turnaround—and could now be an opportunity to buy before the crypto market rebounds? Read on to find out what’s causing the crypto bear market, what investors can do to prepare for an upswing, and where to buy crypto if you’re considering a purchase.
What’s causing crypto prices to fall?
A combination of macroeconomic headwinds has been buffeting both crypto and equity markets. Between the war in Ukraine, red-hot inflation, large interest-rate spikes and slower job growth, there has been a spate of macro news fuelling uncertainty and triggering wave after wave of sell-offs.
“The ongoing weakness in the crypto market is due to the [U.S.] Federal Reserve’s aggressive stance and continued rate hikes, which is withdrawing liquidity from the market,” says Marcus Sotiriou, analyst at GlobalBlock, a publicly listed digital asset broker. He adds that markets view crypto as a high-risk asset, “and these assets get sold off when financial conditions tighten.”
It doesn’t help that the crypto market has been closely following equity markets for some time. Previously, the two were mostly uncorrelated, and for many investors that divergence was part of cryptocurrency’s appeal.
“The crypto market’s correlation with the stock markets has risen significantly this year, as the economy has entered a new interest-rate environment,” says Dan Ashmore, an analyst at the trade news site CoinJournal.
When will crypto’s price volatility ebb?
The wider market downtrend could end when the Fed eventually pauses its rate hikes or initiates rate cuts, Sotiriou says. “The former is more likely, which is when the Fed will no longer be carrying out aggressive monetary policy,” he notes.
While it’s difficult to predict when this could occur, as it depends on the health of economic data over the coming months, Sotiriou reckons the “middle of next year is a reasonable time for us to reach peak rates for the Fed,” which is when macroeconomic uncertainty, especially with regards to inflation, may subside. Ashmore says that for the volatility to subside, inflation must be brought under control and the energy markets—which continue to be impacted by the war in Ukraine—must settle down. “I’d be hesitant to put a timeframe on this as it’s simply too hard to know, but I expect more [short-term] pain ahead as we move into winter,” he says.
Sotiriou feels some market improvement may be around the corner despite the macroeconomic turmoil “because crypto has absorbed negative news in recent weeks without capitulating further, suggesting short-term strength.”
