Why is the crypto market down today?

Crypto prices keep crashing, and it seems like there’s no bottom in sight. Here are three reasons why cryptocurrency prices are falling today.

Crypto prices are falling on Oct. 7 as Bitcoin (BTC) failed in its attempt to lock in gains above the $20,500 level. For the past 115 days, BTC price has been pinned between $17,600 and $24,500, and the current price action simply shows Bitcoin trading within the lower section of the range. 

Ether (ETH) and a majority of altcoin prices are also seeing single-digit losses. Generally, the crypto market is tracking the pullback taking place in equities markets, with the S&P 500, Dow and Nasdaq down 2.16%, 1.62% and 3.03%, respectively.

Investors know that cryptocurrencies exhibit higher than average volatility, but this year’s drawdown has been extreme. After hitting a stratospheric all-time high at $69,400, Bitcoin price crumbled over the next 11 months to an unexpected yearly low at $17,600.

At the moment, investor sentiment remains soft as investors continue to avoid risk and wait to see whether the Federal Reserve’s current monetary policy will alleviate persistently high inflation in the United States.

Fresh data on the United States labor market shows that for the seventh consecutive month, the market added more jobs than anticipated, which is opposite to the Fed’s objective of cooling down the economy as a way to put a cap on inflation.

The strength of the labor market heightens the chance of the Fed continuing with its 0.75% interest rate hikes, and there are murmurs of a possible 1% hike in the near future.

Let’s take a deeper look at three reasons why crypto prices keep falling in 2022.

Federal Reserve interest rate hikes

Raising interest rates increases the cost of borrowing money for consumers and businesses. This has the knock-on effect of raising business operational costs, the costs of goods and services, production costs, wages, and eventually, the cost of nearly everything.

High, unsupressable inflation is the primary reason the United States Federal Reserve is raising interest rates. And since rate hikes began in March 2022, Bitcoin and the broader crypto market have been in a correction.

When monetary policy or metrics that measure the strength of the economy shift, risk assets tend to signal, or move, earlier than equities. In 2021, the Fed started signaling its plans to raise interest rates eventually, and data shows Bitcoin price sharply correcting by December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled what lay ahead for equities markets.

If inflation begins to taper, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risk assets like Bitcoin and altcoins could again be the “canaries in the coal mine” by reflecting the return of risk-on sentiment from investors.

The persistent threat of regulation

The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets. Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.

The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.

Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.

Scams and Ponzis triggered liquidations and repeat blows to investor confidence

Scams, Ponzi schemes and sharp market volatility have also played a significant role in crypto prices crashing throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry and the market being relatively small compared with equities markets.

The implosion of Terra’s LUNA and Celsius Network as well as misuse of leverage and client funds by Three Arrows Capital (3AC) were each responsible for successive blows to asset prices within the crypto market. Bitcoin is currently the largest asset by market capitalization in the sector, and historically, altcoin prices tend to follow whichever direction BTC price goes.

As the Terra and LUNA ecosystem collapsed on itself, Bitcoin price corrected sharply due to multiple liquidations occurring within Terra — and investor sentiment tanked.

The same happened with even greater magnitude when Voyager, 3AC and Celsius collapsed, erasing tens of billions in investor and protocol funds.

Related: Wen moon? Probably not soon: Why Bitcoin traders should make friends with the trend

What to expect for the rest of 2022 through 2023

The factors impacting falling prices within the crypto market are driven by Federal Reserve policy, meaning the Fed’s power to raise, pause or lower rates will continue to have a direct impact on Bitcoin price, ETH price and altcoin prices.

In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that U.S. inflation has peaked and for the Federal Reserve to begin using language that is indicative of a policy pivot.

This article was updated on Oct. 7, 2022.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.