Major cryptocurrencies such as Bitcoin, Ethereum, and BNB may be more susceptible to external market factors than some crypto enthusiasts would like to believe. These major tokens and others fell sharply in the first two weeks of April 2022, with the broader crypto market losing nearly $400 billion in value during this time. Worse still, analysts say a “disaster” in financial markets could send crypto prices crashing even further.
While bitcoin has moved above and above a $40,000 price threshold for most of 2022, the latest price drop reminds investors that decentralized digital tokens can still react strongly to factors such as inflation, taxes and overall market performance.
Key points to remember
- Cryptocurrencies plunged in the first part of April 2022, losing around $400 billion in value in the first two weeks or so.
- Although cryptocurrencies are supposed to operate independently of many external market influences, recent trends suggest that this may not be entirely true.
- Investors should look at factors such as inflation, Federal Reserve policy, and tax season for potential links to cryptocurrency performance.
External Factors Suggest Influence on Crypto Prices
The most recent cryptocurrency selloff coincided with a decline in US stock market futures. These declines may be attributable to news that March marked an 8.5% year-over-year (YOY) increase in the consumer price index (CPI). Inflation remains a major concern and with it the possibility of a recession in the short to medium term. Investors who view cryptocurrencies as a solid alternative investment during turbulent market times should carefully monitor cryptocurrency price developments as the Federal Reserve works to rein in inflation.
Impact of tax season?
The recent drop in cryptocurrency prices may also be partly due to tax season. Over the majority of recent fiscal seasons, from January to March, Bitcoin has fallen. Although it may be a coincidence, some analysts suspect that Bitcoin tends to underperform in the first months of the year compared to other months, as investors who have made large gains in crypto assets over the past the previous year tend to sell part of their holdings to cover anticipated taxes. Passives. This is complicated by the disparate ways in which jurisdictions treat capital gains.
Federal Reserve policies
As analysts expect the Federal Reserve to raise interest rates and borrowing costs, crypto investors may want to watch for signs that economic demand is suffering. This can be felt especially in traditionally riskier areas like cryptocurrency. Rising bond yields could also minimize the excess return investors could get from cryptocurrencies over safer bets like bonds. Combined with lingering inflation and other large-scale economic concerns, this change could cause investors to turn away from cryptocurrencies for safer alternatives. This could be reflected in the price level of digital tokens for those who continue to trade in this space.