Why did the cryptocurrency market lose $1trn in two months?

Last November, Bitcoin (BTC) and a number of altcoins reached all-time highs, bringing the total cryptocurrency market cap to over $3 trillion (£2.18 trillion, €2.6 trillion) for the first time ever.

Fast forward two months, and a trillion of that is now gone. What forces were behind this evaporation of a third of the cryptocurrency market capitalization?

After a record-breaking November, December was a very busy month for the cryptocurrency market. BTC fell sharply in the first weekend, which is widely attributed to the Omicron coronavirus variant that has spooked the broader market. However, the hypothetical symbol was already on a downtrend, as shown in the chart below.

Then, as of January 7, 2022, the total cryptocurrency market cap has fallen to less than $2 trillion. What led to this seemingly abrupt turnaround, and what has driven the market down over the past couple of months?

Macro effects behind the scenes

The single biggest impact on the sudden change of fortunes in a market that has so far thrived on the back of stimulus, was policymakers changing their tone – specifically, the December report of the US Federal Reserve’s Open Market Committee (FOMC). ) Meeting.

The FOMC report indicated a shift towards a more hawkish mood, which has persisted to the present moment.

“US central bankers are unanimous in saying that US interest rates will rise more and faster than previously expected, triggering a sell-off of risky assets,” said Tom Rodgers, head of research at ETC Group.

He continued, “The Fed has now acknowledged that inflation is not ‘temporary’ after all, [despite this being] The line she was trying to turn into skeptical markets.”

“I know it’s crazy to think about it, but only 18 months ago, you could still buy bitcoin for less than $10,000 and ethereum,” said Michel Simpaliste, founder of Domination Finance – a decentralized exchange unguarded for dominant trading -. [ETH] Less than $300. Solana [SOL] frequency [LUNA] Both are under $1. The rise in the cryptocurrency market since March 2020, the collapse caused by Covid is nothing short of astounding.

It is likely that the macro environment led to the cryptocurrency’s decline in November, December and January. The Fed stopped printing money and a hike in interest rates was largely expected in early 2022. This is usually bad news for risky assets such as stocks and cryptocurrencies.”

He concluded: “Whether that is priced now or if we are going down in 2022 [yet] to look at her. But many macro-oriented traders have largely shed risk in the last quarter of 2021, given the Fed’s approach heading into 2022. The “don’t fight the Fed” really works both ways.

Chart: The cryptocurrency market saw a trillion dollar outflows in just two months

Total market capitalization of cryptocurrencies over the past months. – Credit: TradingView

More digging for bad news

When China – until then the world’s crypto capital – banned mining in all of its territory in May 2021, it caused BTC to crash.

When social unrest erupted in Kazakhstan, which led to deadly protests and nationwide internet outages during the first week of 2022, cryptocurrency makers were forced to flee the world’s second-largest crypto-trading country, and the price of Bitcoin plunged again.

Rodgers points to “the collapse of the infrastructure in Kazakhstan, where there is about a fifth of the Bitcoin hash rate, with this price shock and the subsequent liquidation of long-term buying positions of speculative traders,” as another reason behind the outflow from the cryptocurrency market.

He believes that we “have likely seen Kazakh crypto miners looking to flee the country and liquidate the bitcoins they have already mined in order to fund the move.” Such a move could cause a large supply of bitcoins to hit the market at once. So when there is a sudden increase in supply, it naturally leads to a decrease in price.

He added, “There is also a lot of speculative leverage in the riskier parts of the crypto day trading market. With supply hitting the market and the price suddenly dropping, we saw a series of highly leveraged long positions being liquidated – and subsequent margin calls – and further liquidations. “.

Read more: Bitcoin briefly trades above $43,000 as volatility continues

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