For comparison, the S&P 500 has dropped about 17% since the start of 2022. Why is BTC seeing such high losses in 2022?
Why is Bitcoin Falling?
Risk assets are investments that experience significant volatility in the ordinary course of the market. Stocks, commodities, and high-yield bonds are considered risk assets because you can expect their prices to move up and down frequently in almost any market condition.
Until recently, Bitcoin was considered a store of value that was somewhat immune from fluctuations in the value of risk assets. This is no longer the case. Today, BTC has fallen prey to the various factors that move the value of risk assets – such as inflation, stock markets and Fed monetary policy.
Author of the Risk Rituals Newsletter, Dr. “The reason this particular drop is occurring right now is because [crypto] market narratives are shifting from risk-to-risk to risk,” Richard Smith said. “Liquidity is drying up as the Fed and other central banks begin to cut back on excessive stimulus, and also as ordinary people begin to realize that Covid-19 is slowing, we’re going back to work and we’re not all. Buying NFTs and moving to the metaverse tomorrow. “
But there is an even more esoteric factor at work in the cryptocurrency markets recently that is helping to push Bitcoin further down.
Terraform Labs Breakdown
Terra (LUNA) suffered a major disruption over the weekend, losing 90% of its value and causing chaos in the crypto world.
LUNA is the native token in the Terra protocol. It is part of the pegging mechanism for TerraUSD (UST), the other native token in the Terra protocol. Until recently, UST was a relatively popular stablecoin.
The purpose of a stablecoin, as the name suggests, is to provide a “ secure ” crypto asset that provides a stable valuation. They are managed by pegging their value to the price of a fiat currency such as the US dollar. The goal is for the stable coin to maintain the same value as the stable currency; for example a coin should always be worth one US dollar.
The most popular stablecoins, Tether (USDT) and USD Coin (USD), maintain stable by holding large US dollar reserves and other assets to support them and prevent their value from fluctuating wildly like other cryptocurrencies. But UST works with LUNA in a completely different way – it’s an algorithmic stablecoin.
UST has dropped more than 30% this week, questioning the validity of algorithmic stablecoins.
It also appears that the Luna Foundation Guard is trying to support UST with Bitcoin before the weekend run takes place. Earlier this month, the Luna Foundation Guard (LFG), the nonprofit that supports the Terra blockchain, purchased $1.5 billion in Bitcoin and a total of nearly $3 billion in reserves as part of its larger strategy to reach $10 billion in Bitcoin this year.
On Monday, LFG said it will lend hundreds of millions of dollars worth of Bitcoin to defend the UST stable currency.
Bitcoin Gets a Hard Start to 2022
Bitcoin puts 2021 around % It closed with a 70 percent increase. This is a great return for any asset class. Still, a 70% annual return represents a drop for Bitcoin after gaining more than 300% in the lockdown-ravaged year of 2020.
Alex Reffett, co-founder of asset management firm East Paces Group, said that in 2022, investors are in a risk aversion mood, embracing a “general flight to safety in most asset classes” . “Collectively, investors have shown more interest in value-based investments and less in speculative stocks and alternative ‘store-of-value’ investments.”
One reason for this is the Fed, which has repeatedly increased interest rates to combat inflation levels not seen in the US for four decades. Analysts expect the central bank to continue tightening interest rates through 2023.
When the Fed raises interest rates, it has the effect of curbing demand for more growing companies, such as tech stocks and speculative risk assets like Bitcoin. It is an open question to assess how much demand will remain for crypto as all liquidity dries up.
Steve Sosnick, chief strategist at Interactive Brokers , said, “We have no historical precedent for how Bitcoin and other cryptos might move if we enter a perpetual era where central banks are actively draining liquidity” . These tend to be tough times for investors, and riskier assets tend to underperform than safer ones.
Bitcoin Becomes a Volatile Monster
In addition to the equation, there are market disruptions caused by the Russian invasion of Ukraine.
Reffett, “Geopolitical concerns are increasing market volatility in many tradable asset classes and Bitcoin has proven to be somewhat related to broad market movements and less of a direct hedge against equity markets” said.
The problem is that Bitcoin has not proven itself as a hedge against anything. After all, with inflation at its highest levels in four decades, you would expect a currency that claims to maintain its purchasing power and is independent of any central bank to gain more followers. If this statement were applied to Bitcoin, wouldn’t the demand be off the lists?
Instead, Bitcoin seems to find supporters when the price rises, and raise suspicion when sellers dominate, just like a risk asset.
In fact, Bitcoin has seen eight 50% drops from its all-time high since 2009. Dr. “Anyone who is not good with at least a 50% drop should not be on Bitcoin,” Smith said . “50% drops are perfectly normal for Bitcoin. This is the entrance fee.” said .
Should You Own Bitcoin?
Buying Bitcoin used to be reserved for tech early adopters and took a brief moment to explain to confused readers how to exchange Bitcoin for dollars and then exchange Bitcoin for something normal like pizza. journalism emerged. (In retrospect, pizza was very expensive.)
Over the years, Bitcoin has become more common and easier to buy through relatively secure exchanges like Coinbase. Today, dignified, discreet money managers like the folks at Minneapolis-based money management firm Leuthold Group claim that a percentage or two of your portfolio could go to Bitcoin.
Economist Tyler Cowen wrote in a Bloomberg column , “At some point the market will understand the value of crypto and incorporate that knowledge into a high price level for these assets .” “ From then on, expected rates of return – I dare say – will be normal.” used the expressions.
By investing in Bitcoin now, you hope that the speculative frenzy has not subsided and you can then sell it for much more than you paid for. But recent history must be that such plans, while tempting, are never easy to achieve.
You never know when the speculative investment excitement will go away.
