The cryptocurrency market has exploded in recent years as digital assets have over a $3 trillion market cap. Despite Bitcoin’s strong rally in November and December of 2021, the cryptocurrency market is tumbling into a downtrend. Cardano, a top-performing decentralized bitcoin platform with ADA as the primary cryptocurrency, was down from its all-time highs in September 2021.
There are several reasons that could explain the decline in the cryptocurrency market. The bitcoin trading market has seen significant volatility due to a more hawkish Fed planning to fight spiraling inflation. The Federal Reserve’s decision to hike interest rates as much as seven times this year has been a driving force behind the recent decline in the cryptocurrency market. Riskier assets like equities and cryptocurrencies have suffered due to the Fed decision. Risk-off market sentiment has also driven down the price action. Furthermore, US President Joe Biden’s executive order on digital assets is also bound to impact crypto trading. The coordination process in implementing the executive order will be crucial in determining the future price direction of cryptocurrencies and bitcoin.
The cryptocurrency market has whipsawed in recent months, with prices going all over the place. In April of 2021, Bitcoin reached $60,000 but plummeted to less than $30,000 in July. Bitcoin is known to be volatile. When the Fed announced that it would hike rates in November, Bitcoin started declining before the S&P 500. Bitcoin and the S&P 500 reached an all-time-high correlation on January 31st, signaling why crypto cannot be used as a hedge against inflation. However, bitcoin’s price action will likely remain even more volatile as the Fed maintains a hawkish stance. Since November, Bitcoin has lost over 40% of its value in a crypto crash, and other cryptocurrencies have suffered comparable losses.
Crypto had been seen as a hedge against inflation in the past. However, economists have concluded that crypto has experienced similar ups and downs to equities and other riskier assets globally. The volatility of cryptocurrencies results in substantial declines when the economic outlook is uncertain. The prospect of multiple Fed rate hikes will lead to continued volatility in the crypto market.
Reaction to Risk-off Sentiment
Short-term bullish factors for Bitcoin, including inflation, sanctions, and geopolitical conflict, could be bearish for bitcoin in the long run. Cryptocurrencies have been trading in tandem with risky assets rather than safe-haven assets. As a result, risk-off sentiment in the market has caused cryptocurrencies to drop. Mounting inflation pressures in the US and the rising negative sentiment make hedging in volatile markets a risk-appropriate endeavor. Additionally, bearish market conditions indicate that the recent slump is rational.
The Fed’s decision to aggressively hike interest rates as much as seven times this year will be a headwind for the crypto market. The FOMC meeting minutes from March signaled that the hawkish Fed plans to tighten rates by 50-basis points and taper bond purchases.The Fed plans to reduce the balance sheet by $95 million per month starting in May. The Fed will phase in a maximum of $60 billion in treasuries and $35 million in mortgage-backed securities over a three-month period. The Fed also raised its outlook for inflation, a primary reason for hiking rates, and lessened its economic growth expectations.The Fed’s recent hawkish action generates greater uncertainity for risky assets like cryptocurrencies. Traders find it difficult to maintain their bullish outlook.
The Russia-Ukraine conflict has caused cryptocurrencies to tank even further. After Russia invaded Ukraine, bitcoin trading volume increased and then stabilized. However, Bitcoin has not played a significant role in the conflict. Russian oligarchs are not using crypto to evade sanctions as many investors predicted.
Despite this, cryptocurrencies were among the hardest-hit assets. Cardano led the decline, dropping 18%, sliding to $0.74 from $1 a week earlier. Crypto-tracked futures saw roughly $350 trillion in liquidations since the start of the Russian invasion.
Biden’s Executive Order on Digital Assets
As digital assets like cryptocurrencies become more common, the US must play a leading role in global governance to encourage innovation while mitigating risks to consumers. On March 9th, President Biden signed an Executive Order addressing the risks and assessing the benefits of digital assets. Many people expected Biden to crack down on crypto. However, the overall tone of the meeting points toward more positivity in the market. Following Biden’s order, most cryptocurrencies fell or remained flat during trading.
Additionally, the order explored whether the federal government should create its own digital currency. However, the digital dollar is far from coming to fruition. This prospect has generated turmoil in the market. Some argue that a federal digital dollar would counter crypto’s decentralized ideals.
A key element for an Executive Order is follow-through. The key players described in the report, including over 15 agencies, will need to be held accountable for their roles in regulating crypto. This action could lead to increased optimism about cryptocurrencies, but a lack of follow-through may result in a more significant downturn.
The Bottom Line
Several factors have contributed to the recent crypto crash. The volatility of cryptocurrencies has resulted in more significant decreases during periods of economic uncertainty. The Fed’s decision to aggressively tighten rates will put downward pressure on the volatile crypto market. With increasing geopolitical tensions and unprecedented inflation, riskier assets, like Bitcoin, become less appealing to investors as there is more volatility in those markets. However, such volatility may provide a period of opportunities and risks for those who invest in the price of top cryptos like Bitcoin trading and Cardano as CFDs. The Russia-Ukraine conflict did not lead to an increase in the prices of cryptocurrencies, as the asset did not play a prominent role for any parties. Bitcoin is not acting as a safe-haven asset. The crisis led to a plunge of cryptocurrencies, led down by Cardano’sdrop of 18%.
Finally, Biden’s recent Executive Order on Digital Assets could impact the cryptocurrency market. The report did not immediately affect the crypto market, but there is increased optimism surrounding cryptocurrencies in light of increased regulation and the push for further innovation. However, the implementation of a federal digital currency has been met with backlash, as it could threaten the decentralized nature of cryptocurrencies. The Executive Order will have implications for the cryptocurrency market that have not yet been uncovered.