Why Cryptos Are Crashing

Cryptocurrencies have experienced a significant drop this week, continuing a trend that started back in November when most of them reached their peaks. Bitcoin briefly fell below $90,000, and many altcoins saw double-digit declines. This article examines the reasons behind the crash and whether there’s hope for a recovery this year.

Why Crypto is Crashing
There are three main factors contributing to the current downturn in the crypto market. The most significant factor is the performance of the bond market. Rising bond yields globally, particularly in the United States, have played a role in affecting the crypto market. In the US, the 30-year bond yield reached 5%, the highest in years. Similarly, in the UK, the 10-year gilt yield rose to 4.90%, and in Australia, the 10-year yield reached 4.70%. Only China is seeing the opposite trend, with yields continuing to decline due to its ongoing deflationary pressures.

The increase in bond yields, especially in the US, suggests that the market expects the Federal Reserve to keep interest rates high for an extended period. This expectation grew stronger after the release of strong jobs data in the US, which showed that the unemployment rate dropped to 4.1% as the economy added 256,000 jobs. Federal Reserve officials have hinted that they may only lower interest rates twice this year, keeping them at 3.25%, higher than analysts had predicted. This rise in bond yields and the strengthening US dollar have negatively impacted most assets, including stocks and commodities. This is why major US indices like the Nasdaq 100 and Russell 2000 have fallen recently.

Another reason for the crypto slump is a phenomenon known as mean reversion. This occurs when financial assets return to their average prices after a period of rapid growth. Many cryptocurrencies, including Bitcoin, Cardano, Shiba Inu, and Solana, had risen over 40% above their 50-day moving averages at their peak. Now, they are falling back to more average levels.

Will Crypto Prices Rise Again?
Despite the current downturn, there are a few potential factors that could push crypto prices higher in the near future. First, if the US publishes weaker-than-expected inflation data, it could serve as a catalyst for a rebound in crypto markets. Economists expect the Consumer Price Index to rise from 2.7% to 3%. However, if inflation drops unexpectedly below 2.7%, it could boost confidence in cryptocurrencies and stocks, increasing the likelihood of more interest rate cuts.

Another possible driver for higher crypto prices is the hype surrounding Donald Trump’s inauguration. The incoming president is expected to issue executive orders related to Bitcoin and cryptocurrency, which could have a positive impact on the market. Additionally, Trump’s inauguration will coincide with the resignation of Gary Gensler, which may further benefit the crypto industry. There’s also speculation that Trump could fulfill his promise to pardon Ross Ulbricht, the founder of Silk Road, which could boost the market.

Lastly, the FTX estate is set to distribute over $16 billion soon. While many creditors are expected to convert these funds into cash, some may choose to invest in cryptocurrencies, potentially driving prices higher.

In conclusion, while the current crypto market slump is largely driven by factors like rising bond yields and mean reversion, there are potential catalysts that could help prices recover in the near future.
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