Hello and welcome to the latest Overbit Insights. This week we will go over a few scenarios as investors seek answers about the market meltdown.
It is reasonable to assume that January 21 became the month's, and possibly the years, "Black Friday." With total market losses reaching $137 billion in the previous 24 hours, below are some of the likely explanations or factors for the crash.
Market liquidations driven by cryptocurrency today saw one of the greatest ever single-day liquidations, with about $880 million in liquidations reported from the market's opening until the time of this report. Bitcoin led the way, with about $175 million in liquidated contracts. When it comes to a market crash, this is one of the most important aspects, as what’s known as ‘cascading liquidations’ tend to exacerbate moves to the upside or downside.
Another such factor for the crash is the recent news on one of the latest countries to outlaw cryptocurrency usage. Russia, one of the world’s largest economies, recommended a ban on the usage and mining of cryptocurrencies on all Russian territory. "The best solution is to introduce a ban on cryptocurrency mining in Russia" the bank declared openly.
Lastly, there was a massive drop in the US stock before the weekend. The US stock market has historically had a substantial influence on the crypto market, and it would not be surprising if this is the case today as well. Over the last 72 hours, the S&P 500 Index has dropped over 4%. Furthermore, because Bitcoin and the SPX have a connection as high as 0.59, the drops were likely going to affect one another.
On Saturday, cryptocurrency prices continued to plummet, with Bitcoin losing over half of its value since reaching a peak in November.
Bitcoin, the world's most valuable cryptocurrency in terms of market capitalisation, fell around 8% on Saturday, trading slightly above $35,000. In November, the coin reached a new high of $69,000, marking an almost 50% drop. Meanwhile, ether, the second-largest cryptocurrency by market size, has dropped about 10% on Saturday to roughly $2,400.
The losses followed a drop in the stock market on Thursday. Cryptocurrencies and traditional equities have been dropping in lockstep this month, as investors worry about the impact of anticipated Federal Reserve interest-rate rises on the market.
A typical investment thesis for Bitcoin is that it acts as a hedge against growing inflation as a consequence of government stimulus, but economists warn that a more hawkish Fed might deflate the crypto market's sails.
There is also a danger that US officials may tighten their grip on digital currency even further. Earlier this week, Russia's central bank suggested a ban on the usage and mining of cryptocurrencies. Officials claimed it presented a danger to financial stability, individuals' well-being, and the country's monetary policy autonomy. Authorities in the United States have likewise tightened their grip on key sectors of the market.
Though it’s impossible to say where the market lands when it’s in such turmoil, it does seem evident that markets are worrying about their risk-on assets after an 18-month bull run. Inversely, safe assets like gold and silver have fared well in January 2022, even exhibiting some relative strength.
Nevertheless, today serves as a good reminder to always have proper financial management in place. Cryptocurrency markets have shown no shortage of explosive moves historically, and this will likely not change for the foreseeable future.
Thanks as always for reading Overbit Insights - take care until next time!