Bitcoin, the biggest digital currency in the world, has dropped by more than 20% from its all-time high. Similarly, Ethereum has dropped by more than 20%, while Binance Coin has fallen by more than 25%. In total, the market capitalization of all cryptocurrencies tracked by CoinMarketCap has dropped to only $2.1 trillion.
Why Did Crypto Drop?
Although it can be argued that such dramatic price rises as have been seen in cryptocurrencies will inevitably see a dramatic snap back, there are several specific reasons to which the sudden price falls can be attributed.
Inflation and High Interest Rate Fears
The price of cryptocurrencies has retreated, in part, because of the rising fears that the Fed will reverse course and starts tightening. This is after data from the United States showed that the economy was doing better than expected.
Early this month, data by the Bureau of Labour Statistics (BLS) revealed that the country’s unemployment rate rose to 6.1% while the economy added just 266,000 jobs. While these numbers were disappointing, other flash numbers have been encouraging. For example, the number of initial and continuing jobless claims numbers have been retreating recently.
Similarly, the Job Openings and Labor Turnover (JOLTs) report revealed that the number of vacancies was rising, Further, many large employers like Amazon, Walmart, and McDonalds have started to raise wages to attract new workers. Therefore, there is a possibility that the unemployment rate will move below 5% later this year.
Meanwhile, consumer prices have risen substantially in the past few weeks. Data released last week revealed that the overall Consumer Price Index (CPI) rose by 4.2% while the Producer Price Index (PPI) rose by 6.2% in April. This increase was because of the recent stimulus package and the rally incommodity prices.
Therefore, these numbers have sent signals that the Fed will start tightening, which has dragged Bitcoin and other cryptocurrencies lower. Other assets that have struggled have been growth stocks like Tesla, Okta, Roku, Shopify and Netflix. Indeed, the Vanguard Growth ETF has lagged the Vanguard Value ETF.
Elon Musk
Bitcoin and other cryptocurrencies have dropped because of the recent statements and tweets by Elon Musk. Last week, the Tesla CEO surprised the market when he said that company would stop accepting the currency. He cited the massive amount of fossil fuels that are used by Bitcoin miners. He also said on TV that Dogecoin was “a hustle”.
Critics were quick to question that assertion. For one, according to studies, more than 70% of Bitcoin mining is done using clean energy like solar and wind. Also, they pointed to the fact that the company had not sold its Bitcoin holdings.
Tesla and Elon Musk are important in the Bitcoin industry because of their role in the world economy. Tesla has moved from a small company to a $600 billion automaker. At the same time, Elon Musk has become the second-richest person in the world. As such, they are looked upon by many traders and investors.
Some Cryptocurrencies Performed Well
While most cryptocurrencies have struggled recently, some have done relatively well. For example, Polygon reached an all-time high today, bringing its market cap to more than $12.9 billion. This rally was because many projects are moving to its Ethereum network. The most notable was Aave, the second biggest DeFi project. Polygon’s MATIC has jumped by more than 120% in the past 7 days.
Aave has also done well. The currency rose to an all-time high today as its total value locked rose by more than 6%. It has risen by almost 50% in the past 7 days. Other cryptocurrencies that have gained in the past seven days are Cardano, Ripple, Solana, and Kusama.
Polygon All-Time High
There have been bigger winners in the past seven days. Internet Computer’s price has dropped by more than 50% while Bitcoin and Binance Coin have dropped by more than 20%. Filecoin, Shiba Inu, and Monero have all dropped by more than 20% also.
Ethereum Price Forecast
The daily chart shows that Ethereum price dropped to $3,107 this week. This was a 30% drop from its all-time high. The chart also shows that the currency is currently hovering at the 23.6% Fibonacci retracement level. Notably, the currency has moved below the 25-day moving average and is about 15% below the 50-day EMA. Therefore, a volume-supported drop below the current level will mean that bears have prevailed. That will open the possibility of the currency dropping to the 50% retracement at $2,300.