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A week ago, cryptocurrency prices were in green, with Bitcoin (BTC) surpassing $ 24,000 for the first time in over a month. The cryptocurrency’s total market cap has finally crossed the $ 1 trillion mark again, and some investors have dared to hope the worst was over. Unfortunately, these hopes turned out to be unfounded. A flurry of news, including Tesla’s revelation that it had sold 75% of its bitcoins, disrupted a brief rally.
It would be nice to think that cryptocurrency prices have hit rock bottom and we can leave the problems of the last eight months behind. But it is unlikely. There are too many obstacles to overcome and prices could drop further.
Nobody has a crystal ball and it’s impossible to know for sure what Bitcoin’s next moves will be. But we can look at the factors that can affect prices and make some assumptions. Two main reasons explain why the current decline in prices is likely to continue: macroeconomic conditions and market confidence.
1. Macroeconomic conditions
Many economists warn that the United States could soon face a recession. Furthermore, consumers are grappling with a staggering cost of living, the crisis between Russia and Ukraine continues and Europe is in an energy crisis. This is not conducive to the growth of the cryptocurrency.
Part of the reason cryptocurrency and stock prices fell this week is the uncertainty surrounding two announcements expected in the coming days. First, the Federal Reserve will decide how much to raise interest rates. Rising interest rates are not good for cryptocurrency prices as they can lead investors to abandon riskier assets.
Another number to keep an eye on is GDP. One way to define a recession is two quarters of negative growth. When the Bureau of Economic Analysis reports that the economy has contracted again in the second quarter of this year, we can expect many headlines about the recession. Not everyone agrees with this data (or with this definition of a recession). But the perception of being in a recession is likely to impact cryptocurrencies as well.
2. Trust in the cryptocurrency market
A lot has happened in the cryptocurrency industry over the past few months and it will take some time for people’s trust to be restored. We have seen the collapse of major currencies and the implosion of several cryptocurrency lending platforms, as well as a drastic drop in prices. Unfortunately, many people who were the first to buy cryptocurrencies last year are now overwhelmed with their investments. This means that the value of their portfolios is less than the capital employed.
Additionally, a new cloud transfers cryptocurrencies. The SEC said at least nine cryptocurrencies traded on Coinbase are actually stocks. The worst case scenario is for the SEC to take action against these individual projects and the cryptocurrency exchanges that have traded them. The SEC files a lawsuit against Ripple (XRP) and others may follow.
Konno investors seek regulatory clarity. It is difficult to understand how prices can recover without knowing what form the rising regulation will take. On the other hand, the US is highly unlikely to follow China and ban cryptocurrencies altogether. Or you can bring your own digital dollar, for example. They could also introduce numerous machine registration requirements and business rules. All of this would have a significant impact on the cryptocurrency industry.
What does this mean for investors?
If everyone knew how to predict the market, we could buy at absolute lows and sell at highs. But that’s not how investing works, and trying to find an absolute minimum can lead us to make fundamental decisions.
It is important to think long term and evaluate the success of Bitcoin and cryptocurrencies over the next five, ten or even twenty years. There are reasons for optimism: Some financial gurus believe Bitcoin could one day be worth $ 500,000 or even $ 1 million. But there are also reasons for caution: cryptocurrencies could change the way money is handled, but they could also go bankrupt altogether.
If you are bullish on Bitcoin, you might consider this period as an important mining period instead of trying to find a low. If so, make sure you only invest money that you can afford to lose and don’t prioritize buying cryptocurrencies over other financial goals like an investment fund, emergency savings, and retirement. Bitcoin could drop further, especially if global economic conditions worsen. The trick is to position yourself to tap into potential earnings, but be careful not to suffer financial ruin when cryptocurrency prices drop to zero.