Does the Bitcoin, Ethereum, Solana, and Cardano Price Crash Signal Another Crypto Winter?

Leading cryptocurrency rates, including Bitcoin (CRYPTO: BTC)And Ethereum (CRYPTO: ETH)And Solana (CRYPTO: SOL), And Cardano (CRYPTO: NO) They are down more than 10% in the past week and some are down 20% or more from their highs.

Unlike a company that has a management team and financial numbers, getting to know why cryptocurrency prices are moving so sharply to the upside or downside requires more research. Here are five reasons why cryptocurrency prices are falling – and what to do about it.

Image source: Getty Images.

1. Infrastructure Bill

On Monday, President Biden signed the bipartisan trillion-dollar infrastructure bill. The crypto-related provisions offer some of the ways the administration hopes to boost tax revenue to fund both this bill and the proposed $1.75 trillion better rebuild plan. The bill’s broad definition of exactly what it means to be a cryptocurrency broker includes small and large miners and other individuals or entities that aren’t exactly brokers in the traditional sense. The issue stems from regulatory concerns that the US government is cracking down on the industry, making it less profitable and more troublesome overall.

There is also a provision relating to transactions of $10,000 or more where Social Security numbers must be verified and the transaction reported to the government. This is another deterrent factor that challenges decentralized finance and the crypto market in general.

Bitcoin price chart

Bitcoin price data by YCharts

2. China cracks down on mining

On Tuesday, it was reported that China’s National Development and Reform Commission is continuing its efforts to crack down on cryptocurrency. The lion’s share of cryptocurrency mining currently comes from China, where cryptocurrencies are seen as a direct threat to the country’s official currency and economy. The negative attitude of the second largest cryptocurrency economy is not exactly a positive sign for the market.

3. The strength of the US dollar

On November 10, Bitcoin and Ethereum reached all-time highs of $69,000 and over $4,800, respectively. On the same day, the US Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 6.2% over the past 12 months, the highest annual increase in three decades. Since then, the dollar has shown some strength thanks to higher-than-expected US spending across the retail sector. A stronger dollar means less inflation, which reduces the argument for investing in inflation-resistant asset classes.

Gold and high-yield stocks have always been great ways to combat inflation. But cryptocurrency, especially bitcoin, also has anti-inflation properties due to the fixed maximum supply and independence from any one economy. If inflation starts the other way, that would be great for stocks and the US economy, but bad for cryptocurrencies.

4. Leverage liquidation accounts

Full of speculation, the crypto market is also home to a lot of borrowed money. Using margin magnifies potential gains and losses. Companies like BlockFi and Queen Piece They are willing to pay high interest rates to their users in exchange for holding stablecoins, big-cap cryptocurrencies and even digital currencies on their platforms because they can lend the same assets at a higher interest rate and earn money on the spread. However, when prices collapse and investors lack the capital to keep their accounts fluid, the broker can forcibly issue a margin call. If the user is not able to add new funds to the account to boost his equity, he may need to sell cryptocurrencies at low prices to raise funds to cover the shortfall.

In the last 24 hours alone, more than 147,600 traders have liquidated $609 million, which is an average of more than $4,100 per trader. That’s a lot of money, hastily gone. Although the cryptocurrency market is still bullish so far, there have been several liquidations that triggered a massive selloff, including the May crash that spilled over into the sell-off in June, and even the short pullback in September. Simply put, the widespread use of debt by cryptocurrency traders is adding fuel to the fires of the crash, but it can also accelerate the boom to the upside.

5. The possibility of winter in cryptocurrencies

The cryptocurrency market is no stranger to volatility. But there are few phrases that are more frightening than the threat of an impending crypto winter.

Crypto winters are basically long periods of stagnating or declining cryptocurrency prices. In the past, they arrived a year and a half to two years later after Bitcoin “halving.” Bitcoin is halved when the reward for each mined block is cut in half. They occur approximately every four years. Given that the last halving was in May 2020, many expect that the crypto winter will begin sometime in the next six months. However, the reward for each blocked mining is much lower than it used to be, and about 90% of the Bitcoin supply is already in circulation. Given this background, Halvings Must Less effect over time.

Quite frankly, it doesn’t make sense for Bitcoin and other crypto prices to go through a somewhat predictable cycle of bullish and bearish years like they did in the past. But since it has happened in the past few truces, and there is widespread consensus that it could happen again, we can see a ‘sell the rumor, buy the news’ situation.

What are you doing now

The above five reasons have one thing in common – they are short-term challenges. The truth is that the long-term thesis for investing in top-tier cryptocurrencies like Bitcoin and Ethereum, or even high-growth alternatives like Solana and Cardano, hasn’t changed a bit.

Investing in cryptocurrency requires a great deal of patience and risk tolerance. So far, the reward has been totally worth it. And given the rise of decentralized finance and the most exciting projects in the crypto space, there is every reason to believe that cryptocurrency remains a great long-term investment even as we approach another crypto winter.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.