Most cryptocurrencies are falling right now: Why?

Bitcoin, ether, binance coin … most cryptocurrencies will see their prices fall in early 2022. What is it related to?

After breaking records in 2021, bitcoin 2022 starts much less spectacularly. The most valuable cryptocurrency fell in a few minutes below the $ 40,000 threshold on January 10th. And it has lost 14% of its value since the beginning of the year. It is far from being the only one experiencing a difficult start to the year. Popular cryptocurrencies such as ether or binance coins are also half-staffed. Thus, for the first time in several months, Ether fell below the $ 3,000 threshold on January 10th.

What happens ? The “threat” to crypto can be summed up in three letters: FED. In fact, a single-point report from the US Federal Reserve released on January 5 revealed that it was likely to change interest rates very soon.

Most cryptocurrencies are falling right now: Why?
This start of the year is not easy for bitcoin // Source: CoinMarketCap

Why increase the “price of money”

Central banks like the Fed actually have the main task of controlling inflation by keeping it at a balanced level. For this, they use, among other things, the key interest rates, or more simply the interest rates that they apply to banks, which in turn has an impact on the interest rates that banks apply to individuals or companies. .

When inflation is too low, central banks lower interest rates. Borrowing money then costs less, which promotes investment and less incentive to save. Conversely, when inflation is too high, central banks may decide to raise interest rates. Then it starts to cost more to borrow money. This shift “cools” the economy down by favoring more savings to the detriment of investment.

Most cryptocurrencies are falling right now: Why?
Being able to borrow money easily has favored crypto. // Source: Executium / Unsplash

A very favorable context for crypto

Faced with the unprecedented crisis caused by covid, several central banks have sought to protect the economy within their perimeter from a slowdown by lowering their key interest rates. That is, in particular, what the European Central Bank has done. And that’s also what the Fed did. Since March 2020, the Fed’s key interest rates have been very low (between 0 and 0.25%). A bias that has greatly facilitated borrowing and by extension crypto.

When they can easily borrow money, investors have more leeway to dare risky bets. The fact that the cost of money has been so low since the start of the pandemic has therefore greatly favored cryptocurrencies, assets whose volatility can generate significant gains … and equally brutal losses. It was also in 2020 that bitcoin really took off: While it started the year around € 6,400, it ended around € 23,500.

It’s the end of recess

But that does not hold because inflation is galloping in the United States. In November 2021, it was 6.8% over a year, a very high price increase that had not been observed for almost forty years. This situation has a very direct impact on the purchasing power of the American people. To calm the situation, the Fed planned to raise interest rates. And the latest minutes from the US Federal Reserve (the famous “minutes”) revealed that the tightening of the screws would be faster than expected and could happen as early as March.

In other words, it is the end of the break for investors. When it becomes more expensive to borrow money, they will be less tempted to invest in risky stocks. As Bloomberg points out, this switch will therefore be a real test for bitcoin and its counterparts. Will cryptocurrency enthusiasts continue to bet so much on them when the money stops flowing? The sector will inevitably be affected.

Cryptocurrencies have become democratized

However, it must be acknowledged that this market has also developed significantly. Cryptocurrencies have become democratized. ” The growth in legitimate use of cryptocurrencies so clearly exceeds the growth of criminal use that the share of illegal activities in cryptocurrency transactions has never been so low “, Also recently emphasized Chainalysis. While 3.37% of crypto transactions in 2019 were made by actors involved in activities prohibited by law, this figure had dropped to 0.15% by 2021.

Companies like PayPal now also allow the sale or purchase of cryptocurrencies, companies like Tesla and SpaceX have invested in them, and one country, El Salvador, has even decided to recognize bitcoin as a legal tender.

The regulatory framework for cryptocurrencies is also beginning to become clearer. And the year 2021 proved to us that a crypto like bitcoin has a solid technical foundation. Even when China made the shocking decision to stop bitcoin mining on its land (while it was previously home to between 65 and 75% of global mining), the bitcoin blockchain worked as it should. The severity of the equations is intentionally adjusted to the reduced amount of mining machinery so that activity does not stall and transactions can continue to be validated.

The Ethereum Foundation, for its part, is preparing for a major technical transformation that, if it lives up to all expectations, can significantly reduce the energy consumption of ether mining.

However, how the price of large cryptocurrencies such as bitcoin, ether or binance coins will develop remains uncertain. And the future of the most risky cryptocurrencies, such as the Doge coin or other mem coin, is even greater.

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