Cryptocurrencies: Why Bitcoin Loses Value

Status: 05/10/2022 13:39

The crypto market, with the best-known digital currency Bitcoin at the forefront, has been declining since the end of March. Bitcoin recently fell below $ 30,000. What are the reasons?

By Detlev Landmesser,

For the first time since July 2021, Bitcoin temporarily fell below the $ 30,000 mark last night. The other digital assets like Ether, XRP or Dogecoin followed him down. As recently as November, the oldest and best-known cryptocurrency still traded at nearly $ 69,000.

How dramatic the recent decline is can also be seen when looking at the market value of all currently around 19,300 cryptocurrencies. According to the Coinmarketcap portal, this has just dropped below $ 1.5 trillion. That’s only half of the nearly $ 3 trillion record reached in November last year.

reversal in interest rates

Why are innovative digital stocks so put on the sidelines right now? A key connection becomes clear when looking at interest rate developments. Just when the US Federal Reserve raised its key interest rate for the first time since the end of 2018 at the end of March, cryptocurrencies began to plummet. Conversely, since March 2020, the zero interest rate regime has made the prices of digital currencies good.

A number of central banks around the world are also considered to be the biggest burden on young investment. Many of them are now, for the first time, facing a targeted tightening of monetary policy. Rising interest rates cause problems for assets, which, like cryptocurrencies, do not generate regular income, while forms of investment with interest rates again become more attractive.

Rising risk aversion

In addition, experts identify a growing risk aversion among investors, driven not only by fears of interest rates, but also by the uncertain progress of the Ukraine war. Numerous Institutional investors treated cryptocurrencies as technology stocks, says cryptanalyst Timo Emden of Emden Research.

“Given further rising capital market interest rates and a more restrictive central bank policy, investors’ risk appetite seems limited,” explains Chief Investment Strategist Ulrich Stephan of Deutsche Bank. “Highly speculative and volatile investments such as cryptocurrencies are being thrown out of portfolios in such an environment.” A trend reversal cannot be identified at this time.

Government regulation remains a pillar

A lot has happened in the crypto market since bitcoin’s record high in November last year. After El Salvador, the Central African Republic is the second country to allow Bitcoin as a legal tender. Panama is working to allow cryptocurrencies, not just cryptocurrencies, as a normal means of payment.

At the same time, the opportunities for private investors to participate in the crypto market have also increased in recent months due to more startups entering the market.

Difficult interaction with monetary policy

Meanwhile, a fundamental question for crypto markets remains unanswered: How well do cryptocurrencies fit into central banks’ monetary policy concepts? Their main task remains the stability of the currency, including the regulation of the money supply.

A means of payment other than the national currency, which is not governed by monetary policy, is therefore fundamentally not in the interest of central banks. In this regard, there is always the danger of excessive regulation, including a trade ban, as in China, as the sword of Damocles over the crypto markets.

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