Bitcoin back under pressure as crypto bear market looms

Bitcoin had its worst start to the year since 2012, dropping below $40,000 for the first time since September last year. This brings Bitcoin’s loss in value so far this year to 14%.

The world’s largest cryptocurrency has recovered a bit to stand just above $42,000, but it is still significantly off the high of $68,500 it hit just two months ago.

Cryptocurrency under pressure

Riskier assets, which are considered the most risky cryptocurrency due to their inherent volatility, have suffered greatly recently as the Federal Reserve tightened its policy of withdrawing funds from the capital markets.

The CEO of Infrastructure Capital Advisors, Jay Hatfield, told Al Jazeera that as the Federal Reserve steps back from injecting liquidity, the impact on the cryptocurrency will come under increasing pressure and could end up at less than $20,000 by the end of this year.

Image source © Tanaonte | Megapixl.com

Looks like the party’s over now

The Fed’s tightening of policy is likely to continue bitcoin’s downward spiral as well as the value of the broader crypto market.

Less liquidity from the market affects riskier assets like cryptocurrencies compared to the general market because these investments are significantly more volatile than the market as a whole, and therefore have a much greater risk premium compared to the average stock.

This is a very different story from the last couple of years, which saw the cryptocurrency market rise to a new level as its popularity grew to include major investors, both individuals and institutions.

At the start of 2020, the bitcoin price was around $7,000, which rose sharply in the latter half of the year to end in December at a touch of less than $30,000 — with an annual growth rate of over 300 percent.

Then in 2021, Bitcoin more than doubled to reach a peak of $68,500 on November 11. The hugely increased investment in altcoins like Ethereum and Solana and meme tokens like Dogecoin and Shiba Inu has seen the crypto space truly go to a new level.

why now?

The growth over these two years may seem strange given that the world was in the grip of mandatory lockdowns caused by the Covid-19 pandemic. Keep in mind though how long it takes the economy to catch up.

Last October, the Bureau of Labor Statistics revealed that the US inflation rate would rise to 6.8% through 2021, the highest level since 1982.

Prior to that time, the Fed saw no reason to cut liquidity and tighten policy, which meant people had more freedom to invest in riskier assets.

There is also an argument that the sell-offs that occurred across the market and in Bitcoin in particular were carried out by short-term traders rather than long-term investors.

This makes sense when you consider that those who trade in cryptocurrencies expose themselves to greater risk than those who hold their capital in Bitcoin and the like over the long term.

So, what does the future hold for the crypto market?

It is likely that we can expect more cryptocurrency selling in the near future as investors calculate that the higher the inflation, the faster the Fed will act.

In the long-term, Bitcoin has a good chance of increasing in value from its peak last year as the world becomes increasingly digital.