Crypto Crash of 2022: The Connection Between Interest Rate Hikes & Crypto Prices

Summary:

• The crypto crash of 2022 is mainly caused by a pessimistic global macro outlook brought about by US Fed interest rate hikes.
• The crash saw Bitcoin falling by about 70% from its November 2021 peak value of $69,000, while most other altcoins have fallen by about 80 – 90%.
• This is because as interest rates increase, investors depart from risky assets like crypto and stocks to park their cash in safer assets such as cash or gold.

Cryptocurrency crashes are nothing new in the world of digital assets. As did the internet, blockchain and cryptocurrency, being new technologies, are still going through what is known as a “price discovery” stage.

Just to give an idea of how volatile crypto is, here is a snapshot of the biggest crashes it has weathered from the beginning:

Why Is Crypto Crashing in 2022?

As seen in the chart above, Bitcoin’s price performance is no longer contained to crypto-specific events, but to macro factors that have similar repercussions on the global financial markets.

This is because cryptocurrencies are increasingly adopted by institutional investors who treat crypto as an asset class similar to high-risk tech stocks, and whatever affects the stock market will affect crypto as well.

(According to TradingView, the 90-day correlation between Bitcoin and the S&P 500, reached a high in Sep 2022.)

4 Reasons for Cryptocurrency Crash in 2022

Here are some of the main reasons that have brought about the crypto crash and on-going bear market of 2022, the biggest being rising interest rates.

Rising Interest Rates

By far the biggest culprit of the 2022 crypto market crash–as well as the stock markets–has been rising interest rates.

To back up a little, the US, and in many other parts of the world, has been facing record-high inflation since COVID-19, with the printing of stimulus money (which increases money supply) and supply chain disruptions (which lowers production of goods) driving prices up.

In response, the US Federal Reserve, and many central banks in other countries, have raised interest rates in an attempt to reduce the money circulating in the economy and bring down inflation.

In 2022 alone, the US Fed hiked rates five times in 2022, and more are likely to come. Higher interest rates means homeowners have to pay more for their mortgages and businesses have to pay more for loans.

It also means that holding cash is more attractive relative to investing in assets, since the interest earned from savings or lending money out is higher.

This causes a flight of capital out of riskier assets like cryptocurrencies and into safe haven assets like cash or gold, resulting in a fall in demand and thus prices for riskier assets like cryptocurrencies. This is why traders and investors pay close attention to any news regarding US interest rates, as it is a key factor in dictating stock/crypto price performances.

Speculation and Manipulation

When the crypto market is experiencing growth and investors are seeing their assets appreciate, they are more likely to hold on to their investments.

On the other hand, when the crypto market is crashing and asset prices are depreciating, investors are more likely to sell off their assets to avoid further losses. This event is further intensified when big investors, also known as “whales,” sell their crypto assets.

The whales are often responsible for crypto manipulation as they can single-handedly cause the crypto market to plunge by selling off a large portion of their crypto assets. This usually triggers FUD (fear, uncertainty and doubt), causing prices to fall even further.

Terra Luna Crash

Another key reason for the crypto crash in 2022 was the depegging of the TerraUSD stablecoin (UST) from the US Dollar, which then led to the devaluing of the companion Luna crypto.

The LUNA coin, which launched in 2019, became one of the most successful decentralized finance (DeFi) tokens, and at one point ranked as the seventh-largest based on market capitalization.

However, an unsustainable business model and irresponsibly high-risk strategy caught up with it, amid tumultuous macroeconomic conditions.

In May 2022, LUNA fell 96% in a day, bringing the price to as low as $0.10 and by 13 May, fell to almost nothing–$0.00001675.

As one of the biggest players in the industry, its collapse also pulled down other big names such as Three Arrows Capital. The crypto hedge fund, which had about half a billion dollars’ worth of holdings in LUNA, found its assets worth slightly more than $600 after the LUNA collapse.

Bitcoin Crash 2022

So massive was the spillover effect that the LUNA collapse that it triggered a fall in Bitcoin from the $40,000 range to low $30,000s–when usually it’s the other way around, with Bitcoin (BTC) affecting altcoin price.

The year 2022 has been rough on the king crypto. Ever since it hit an all-time high of $68,790 in November 2021, it has lost about 70% of that value. At time of writing, it is trading at slightly above $19,000.

As Bitcoin plunged, it took down with it all the other altcoins, many of which have fallen by 80% or even 90% from their peak value.

Even Ethereum, the No.2 crypto, failed to achieve much gains even after its successful upgrade to a proof-of-stake consensus mechanism.

Will Crypto Crash in 2022 Again?

Although crypto has experienced a significant crash over the past months, some experts believe that the market has not reached the bottom, the main reason being even more interest rate hikes from the US Fed.

Additionally, the increasing costs of mining due to the global energy pricing crisis due to the Ukraine war is becoming unprofitable for smaller miners. As a result, these miners are forced to sell their crypto assets at a loss, which in turn further drives down prices.

Very interestingly, however, despite the state of price performance, crypto looks to be marching to the beat of its own drum.

• In Oct 2022, America’s oldest bank, BNY Mellon, launched its crypto services unit. Google announced that it will start accepting crypto payment for its cloud services.
• Even the metaverse and blockchain games space has received $1.3 billion of venture capital money in Q3 as reported by DappRadar–while this is about 50% less as compared with Q2, this amount is more than double what was invested in the entire year of 2021.
• MacDonald’s is accepting crypto for its burgers in Lugano, a Swiss town.

It’s still too early to say if crypto is here to stay for good, but headlines such as these point to an optimistic outlook in the sector even as the overall global economy goes through rough waters.