This year has been nothing short of a blood bath for the digital currency. The market has not seen a BTC price this low since July of last year. According to the data from Glassnode, corrections in 2017 and early 2021 were much shallower between 20 and 40 percent, while July 2021 reached a drawdown of 54 percent.
Market analysts believe there are two main reasons behind the latest draw-down, the most important being hawkish signals from the U.S. Federal Reserve, which is expected to lead to several increases in the U.S. interest rate. The Fed warned of three possible rate hikes during 2022, but a Goldman Sachs report predicted a faster pace of Fed tightening if inflation continues to rise. In December the inflation rate in the U.S. was seven percent year-over-year, a rate not seen since the early 1980s.
There have been increased geopolitical tensions between the U.S. and Russia.
The situation in Ukraine and the U.S. seem to be the main reason for the drop in the price of bitcoins, adding to bearish pressures around risk assets in general.
According to CNBC, there is a risk that the Federal Open Market Committee will take some tighter action at every meeting until the inflation picture changes, Goldman economist David Mericle noted in Saturday s client note.
Goldman Sachs expects to see four rate hikes this year, each of which raises the interest by 0.25 percentage points, leaving the interest rate at 1.25 percent at the end of the year. Nearly five rate increases are priced for the so-called Fed fund futures. The first increase in borrowing is coming in March, according to most commentators.
The Fed's next policy meeting, due on Tuesday, will be an important indicator as to where the Fed is heading. The announcement will be published on Wednesday at 19: 00 UTC.
According to Coinglass, the latest series of drawdowns have had a huge impact on investors and traders. More than 1.5 billion of trading positions of digital currency were liquidated over the past three days due to margin calls.
The hawkish signals from the Fed are stirring fears that the Fed will compensate for the lax monetary policy that has been prevalent over the past two years of the Covid epidemic. The increase in the price of digital currency over the two years of the epidemic comes in large from the Fed's stimulus packages, including trillions of dollars of money printing.
David Duong, Head of Institutional Research at Coinbase, wrote in a report on Sunday that one of the major drivers of cryptocurrencies has been the surplus of fiscal and monetary stimulator since the last two years has been coming to an end.
The reason why the Fed s policy is bearish for cryptocurrencies is that while interest rates are low and inflation is high, investors tend to move further out of the risk curve to seek yields. If the Fed is tightening its policy in order to lower inflation and increase the interest rate, investors tend to go in the opposite direction, risk-on assets such as equities andcryptocurrencies, and investing in bonds that are now yielding better due to increased interest rates.