Last week, despite the bullish episodes, the crypto sector managed to erase a big chunk of the total crypto market capitalization, pushing it down to $1.5 trillion, which is a low the crypto market witnessed ten months ago.
Bitcoin is leading the crypto slump, with its price falling to a current point of $32,778.87. The last time Bitcoin was that low in terms of price performance, was in July 2021, when the leading crypto fell below $30,000.
Ethereum is following Bitcoin’s price performance closely, with the biggest altcoin reaching a monthly low of $2,374.30 before rebounding and taking back the $2,400 territory.
The rest of the crypto sector is also in the red with several projects inducing double-digit losses, like the Shiba Inu memecoin and Polkadot.
What drives crypto markets down?
One of the biggest reasons for the crypto crash is The Federal Reserve raising interest rates half a percentage point last week, which was followed by a Wall Street stock price slump.
The pressure from Wall Street translated into the crypto sector as well, erasing more than 10% or almost $200 billion over the past seven days.
In turn, senior market analyst at Oanda, Edward Moya, commented that cryptos and major indices like Nasdaq, for example, have been highly correlated in their price action. For instance, the tech-focused index is down 21% in 2022, while Bitcoin is down 22%.
“Bitcoin is really stuck in a sideways news cycle where you’re just waiting for it to be calm on Wall Street, and then you’ll see more people confident in investing. I still think there’s a lot of long-term potential value here, but you have to be able to stomach this volatility.”, Moya added.
Institutional investors cooling down
Another big reason for the market shedding is that 2021 was extremely bullish for institutional crypto investment, but the momentum didn’t pass through 2022. 2021 saw big tech companies such as Tesla and MicroStrategy increase their crypto game, while nations like El Salvador even made Bitcoin a legal tender in its country.
Furthermore, according to data from CoinShares, institutional crypto fund outflows continued for four straight weeks. The data was echoed by Moya, adding that corporate and institutional investors are in a “wait and see mode.”
“There’s a belief that mainstream adoption is taking a lot longer than people expected,” Moya highlighted.
Investors react to economic movements
The third reason behind the market-wide wipeout is investors relying more and more on traditional assets after the COVID-19 pandemic ended and restrictions are falling.
Chris Kline, the co-founder of Bitcoin IRA, noted that some crypto investors are “moving their money back to the dollar, as a starting point, and then seeing what they’re going to do from there.”
Crypto market in a bearish cycle?
As with other assets, cryptos are also subject to cyclical movements, as there have been at least four distinct bull/bear markets since Bitcoin’s inception more than a decade ago. According to experts, Bitcoin may fall to the mid-$20,000 range and consolidate for a while before reverting to a bullish trend.