Let's say you bought a toy and paid $100 for it. The following week someone tells you that they bought that same toy for $30. You don't know how to react to this information.
Your mind goes into a state of confusion, and you want to know how this could be happening. It is similar to what occurred with the price of the Bitcoin cryptocurrency. The value of Bitcoin fell from a peak of over $125,000 to a low of approximately $82,000 in a very short period of time.
So, what factors contributed to this decline in value? Let's examine three primary causes behind the recent volatility seen in the cryptoasset market.
The first cause for this volatility is due to the role of the US Federal Reserve, the institution that establishes the interest rates for the United States and, as a result, has an effect on the entire financial system.
When the Federal Reserve lowers interest rates, the public tends to pull money from bank accounts and place these funds into higher risk investments such as Bitcoin. Conversely, as interest rates rise, individuals tend to view safer options such as Treasury bonds as more enticing and hence pull money from the cryptoasset market back to the Treasury bond market.
The situation becomes even more perplexing. Recently, the Chairman of the US Federal Reserve, Jerome Powell, indicated to the market multiple times that interest rates would likely be lowered again later this year.
Consequently, the market was left in a state of confusion regarding the future direction of interest rates. This alone created panic-selling among investors.
Currently, the price of Bitcoin has fallen to eight-month lows which clearly demonstrates just how closely correlated cryptocurrencies are to changes in monetary policy.
The impact of tariffs enacted by US President Donald Trump will also have an adverse effect on the cryptocurrency market. Remember when he won the presidency? The crypto market was very excited about that news. Within a few months after the election, Bitcoin rose more than 50%. Ethereum, Dogecoin and other cryptocurrencies were also hitting their all-time highs. As a result, many long-term investors sold off their profits and exited their positions.
Then the tariffs came. On October 10, 2018, President Trump instituted a 100% tariff on items imported from China. As a result, US companies now pay twice as much for products manufactured in China. The immediate impact on the economy was nothing short of catastrophic.
After the announcement of the 100% tariff, more than $19 billion worth of Bitcoin disappeared within a single day. Since then, the entire crypto market has struggled to recover.
This is an important aspect of the crypto crisis that many people overlook; the connection between Bitcoin and technology companies. While the tech market booms, Bitcoin generally rises.
As a result, during times of tech market downturns, Bitcoin usually falls even faster than technology stocks fall; and therefore the crypto market is suffering tremendously because of the slowdown in AI-related products and services.
Think about the names of these technology companies: OpenAI, Google, Apple, and Nvidia. Are these technology companies now too expensive? This is a question that is putting additional strain on tech company stocks.
There is a strong correlation between Bitcoin and technology stocks. When technology stocks are rising in price Bitcoin also tends to increase in value; when technology stocks are decreasing in value Bitcoin typically goes down even further than what technology stocks decreased.
Additionally, this correlation has contributed to the decrease in valuation of cryptocurrency due to the overall decrease in technology stocks as a result of the AI bubble burst.
Think about several of the largest technology companies like OpenAI, Google, Apple and Nvidia who have been recently labelled by the media as too expensive.
As mentioned above, the value of technology stocks is being greatly affected and when there is a large decrease in the values of technology stocks so too will the value of Bitcoin usually follow. The current slowdown in the technology sector has also had a direct negative impact on the entire cryptocurrency market as well.
While Bitcoin has rebounded back from its previous crashes many times, today's conditions will prove more challenging than previous recoveries for a number of reasons.
You should always keep in mind that investing in Bitcoin is an investment that has cycles where it goes up, down, and flat.
You should only invest in things that you have a complete understanding of, and understand that you cannot rely on anything or anyone completely when making your investment decisions; you should always do your research.
