Bitcoin is down more than 50% since its all-time high. What is going on?

Bitcoin, the world's most popular cryptocurrency, is trading more than 50% below its all-time high in November. Saloni Sardana explains why the digital currency is in freefall.

Bitcoin has plummeted to its lowest point in nearly six months, with most other cryptocurrencies down heavily too. 

The best-known cryptocurrency rose by 57% in 2021 alone. Yet it has been in freefall in recent days and is down more than 50% since hitting an all-time high of around $68,000 late last year. 

At the time of writing, bitcoin is trading 7% lower, marginally above its session and six-month low of  $33,051. Meanwhile ether is down 10%, cardano down 12% and Solana down 17%. 

What is going on? Why are cryptocurrencies taking such a big hit?

Federal Reserve’s hawkishness is bad news for crypto 

Bitcoin and a raft of other cryptos have not been immune to the slide in “jam tomorrow” assets seen in recent days, which is partly due to the Federal Reserve sounding much more concerned about inflation and much more willing to raise interest rates (my colleague John wrote this morning about why these story stocks have been on a downward spiral).

US inflation figures hit 7% in December, the highest level since 1982. As a result, the Fed has made a number of hawkish announcements in recent weeks, including signalling that it may unwind its unprecedented pandemic-era monetary policy more quickly than expected. Investors now expect the Fed to raise interest rates up to four times this year. 

This has prompted investors to sell assets, including bitcoin, and the tech-heavy US Nasdaq (the US tech index which has been a barometer for the recent bull phase is now down 15% compared to its all-time high in November). 

Bitcoin is not digital gold

Over the years, investors have flocked to bitcoin and other cryptos, attracted by soaring returns. But while proponents of bitcoin specifically have long boasted about the cryptocurrency’s “safe haven status” and its ability to serve as a hedge against inflation – it’s been described as “gold 2.0” by some – in reality, the digital currency has acted more like a risk asset than a safe haven, says Katie Stockton of technical analysis firm Fairlead Strategies. 

Indeed, Stockton notes the correlation between Cathie Wood’s Ark Innovation exchange-traded fund (ARKK) – which owns the most speculative stocks in the market – and bitcoin is rather high. 

“The correlation between bitcoin and high-growth benchmark ARKK still stands at ~60% year-to-date, versus ~14% for the price of gold, reminding us to categorize bitcoin and altcoins as risk assets rather than safe havens,” she said in a Friday note, reports Markets Insider. 

(Charlie Morris of ByteTree has written about the complementary but different nature of gold and bitcoin for MoneyWeek in the past.) 

In recent days, whenever bitcoin or ether took a hit, other cryptocurrencies – known as “altcoins” – often held up. For example, Cardano and Solana, the world’s sixth and eighth largest cryptocurrency by market cap, have both been touted as “ethereum killers”. But Monday’s brutal sell-off didn’t even spare those, with ADA and SOL leading the losses, both down 12% and 17% respectively. 

All eyes are on the Federal Reserve meeting 

The crypto market is eagerly awaiting the results of this week’s Fed meeting, when the Federal Open Market Committee (FOMC) will meet for the first time this year. Crypto investors will be scanning for clues as to just how aggressive the central bank plans to be this year. 

Naeem Aslam, chief market analyst at online forex Avatrade reckons there is further pain ahead for crypto. “Washington is planning to release its plan for dealing with cryptocurrencies as early as February and will ask authorities to begin weighing the benefits of the digital sector against its potential threats”. 

The White House is preparing to release an “initial government-wide strategy” for digital assets as soon as next month to assess their risks and opportunities, something which may pave the way for further scrutiny of the sector, Bloomberg reported Friday. 

In the past year, the crypto market has seen regulators around the world, mostly notably China, introduce tougher measures and even banning cryptocurrency mining, the process by which new cryptos are created. 

Prior to the ban, 65% of the world’s crypto mining took place in China. Last week, Russia announced it may follow suit. While none of these factors is likely to help the crypto market, the current sell-off appears to be more influenced by investors pivoting away from risky assets than by policy news.

Recommended

Early repayment charges: should you abandon your fixed-rate mortgage for a new deal now?
Mortgages

Early repayment charges: should you abandon your fixed-rate mortgage for a new deal now?

Increasing numbers of homeowners are paying an early repayment charge to leave their fixed-rate mortgage deal early, and lock in a new deal now. Shoul…
30 Sep 2022
Energy meter reading day: why you need submit your gas and electricity readings now
Personal finance

Energy meter reading day: why you need submit your gas and electricity readings now

Energy meter reading day - you need to submit your gas and electricity readings as soon as possible ahead of the October energy price increase
30 Sep 2022
Should you fix your mortgage? Here are the best rates available now
Mortgages

Should you fix your mortgage? Here are the best rates available now

Rising interest rates look set to spring a nasty surprise on millions of homeowners next year. You need to take steps today to protect yourself from a…
30 Sep 2022
Why the Bank of England intervened in the bond market
Government bonds

Why the Bank of England intervened in the bond market

A sudden crisis for pension funds exposed to rapidly rising bond yields meant the Bank of England had to act. Cris Sholto Heaton looks at the lessons …
30 Sep 2022

Most Popular

What to do as the age of cheap money and overpriced equities ends
Investment strategy

What to do as the age of cheap money and overpriced equities ends

The age of cheap money, overpriced equities and negative interest rates is over. The great bond bull market is over. All this means you will be losin…
29 Sep 2022
Why everyone is over-reacting to the mini-Budget
Budget

Why everyone is over-reacting to the mini-Budget

Most analyses of the chancellor’s mini-Budget speech have failed to grasp its purpose and significance, says Max King
29 Sep 2022
Mini-Budget: will Kwasi Kwarteng’s gamble on growth work?
Budget

Mini-Budget: will Kwasi Kwarteng’s gamble on growth work?

The government has launched the biggest dash for growth in 50 years, relaunching an approach known as supply-side economics. What is the plan – and wi…
30 Sep 2022