A slight increase in inflation caused cryptocurrency prices to plummet.
- Cryptocurrency investors may find themselves in the cold for a while longer.
- Disappointing inflation data has fueled fears that the Federal Reserve will continue its aggressive rate hikes.
- Cryptocurrency prices have fallen across the board as rate hikes are not good for risky assets.
Stock and cryptocurrency prices plummeted yesterday due to worse-than-expected inflation news. The latest consumer price index (CPI) data showed that inflation rose 0.1% month-on-month and 8.3% year-on-year. Economists were hoping for a slight decline. For consumers, it means high prices don’t go away. For investors, it means continued pricing pressure for higher-risk assets.
The sub-optimal figures make it more likely that the Federal Reserve will raise interest rates by 0.75% by the end of the month. Rate hikes cause people to withdraw from riskier investments like cryptocurrencies, and many economists fear that the Fed’s aggressive moves could trigger a severe recession.
The timid recovery of cryptocurrencies has stopped
The leading cryptocurrency, Bitcoin (BTC) was gradually pushed higher this week. After dropping below $ 19,000 a week ago, BTC had reached over $ 22,600 prior to the inflation announcement. It then dropped to nearly $ 20,000 yesterday, according to data from CoinMarketCap. Several cryptocurrency analysts are predicting further declines.
Ethereum (ETH) is on the verge of its epoch-making merger, a shift from proof-of-work to proof-of-stake mining that will drastically reduce its energy consumption. Ethereum briefly dipped above $ 2,000 in mid-August in the wake of merger optimism, erasing some of this year’s losses. However, it was not enough to sustain its price against the headwinds of the economy, as Ethereum fell around 10% yesterday following the CPI announcement.
The total market capitalization of cryptocurrencies, which had finally returned to above $ 1 trillion in the past few days, has dropped to $ 957 billion. With further economic challenges on the horizon, we can expect cryptocurrency price struggles to continue.
What is a crypto winter?
The term cryptocurrency winter essentially refers to a long period of low prices, a bit like a bear market but for cryptocurrencies. It is often thrown around, although there isn’t much consensus on what constitutes winter, nor on when it might end. The challenge with cryptocurrencies is that they are high-risk assets and a number of projects may fail before they reach spring.
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Indeed, skeptics warn that the entire industry could still collapse. It is still a relatively new market and there are many things we don’t know about how it will develop. This is why it is important to manage the risk you are taking and only invest money that you can afford to lose. Position yourself so that you can benefit from any gains but you won’t face financial disaster if blockchain technology doesn’t do what many hope it can.
Will the winter of cryptocurrencies ever end?
Cryptocurrency investors have seen the value of their portfolios decimated so far this year and it is no surprise that they are getting tired of the cold. Many of the top cryptocurrencies have dropped by as much as 90% from their all-time highs and it is unclear when or if they will recover.
Keep in mind that the last cryptocurrency winter lasted nearly three years (from the beginning of 2018 to the end of 2020) and given that the macroeconomic conditions that partially triggered the crisis show no signs of easing, it may be some time before the prices recover.
One challenge is that the conditions that pushed prices to extraordinary levels in 2021 may not repeat themselves. Low interest rates and COVID-related stimulus payments have both fueled the frenzy, and many new investors felt they couldn’t go wrong. Not only do interest rates rise and household budgets shrink, but more regulation could also prevent a repeat of the cryptomania we saw last year.
Additionally, investor confidence took a hit. In addition to the drastic drop in prices, the collapse of high-profile cryptocurrency Terra (LUNA) and other crypto platforms has caused some to lose their savings. Faced with a potential recession and an international energy crisis, those hoping for an impending price hike will likely be disappointed.
That said, for long-term investors, what matters is how you see the evolution of cryptocurrencies over the next ten or even 20 years. It is a risky investment. But there are reasons for optimism. For example, Ark Invest thinks Bitcoin could take a slice of the international remittance market and many other sectors. The innovation firm predicts that the price of BTC could reach as high as $ 1 million.
Some see prolonged price drops as an opportunity to buy cryptocurrencies at a discounted price. But there are no guarantees. Much depends on your vision of how the industry could develop and your financial position. Prices could drop further and it could take years for them to start recovering.
Long-term cryptocurrency enthusiasts have survived the previous winters, and many investors are hibernating right now. If you hold cryptocurrency and still believe in its long-term potential, the most important thing is to squat, avoid panicking, and wait for the freeze to thaw.