Cryptocurrencies crashed this week, continuing a trend that has been going on since November when most of them peaked. Bitcoin retreated briefly below $90,000, while most altcoins crashed by double digits. This article explores why crypto is crashing and whether they will go back up this year.
Why crypto is crashing
There are three main reasons why crypto is crashing. First, and most importantly, the crash is being driven by the ongoing performance in the bond market as yields jump internationally.
In the United States, the 30-year bond yield rose to 5% for the first time in years. Similarly, in the UK, the closely-watched 10-year gilt yield jumped to 4.90%, while in Australia, the ten-year rose to 4.70%.
The only country seeing the opposite is China, where yields have continued falling as the country remains in a deflation.
Soaring bond yields, especially in the United States, are a sign that the market expects the Federal Reserve to maintain high interest rates for a while. These hopes increased last Friday when the US released strong jobs numbers. The data revealed that the unemployment rate fell to 4.1% as the economy added 256k jobs.
Fed officials have hinted that they will only cut interest rates two times this year, meaning that rates will end the year at 3.25%, higher than analysts expected.
Therefore, the rising bond yields and the US dollar index has affected most assets like stocks and commodities. This explains why top American indices like the Nasdaq 100 and Russell 2000 have slipped this month.
Second, technically, cryptocurrencies are slipping as mean reversion happens. Mean reversion is a situation where financial assets falls back to their average prices after soaring so much. At their peak, most of these coins were up by over 40% from their 50 moving averages.
Bitcoin, Cardano, Shiba Inu, and Solana have crashed
Will crypto go back up?
Three potential catalysts could push crypto prices higher. First, the US may publish weaker-than-expected inflation data on Wednesday. Economists expect these numbers to show that the Consumer Price Index rose from 2.7% to 3%.
A surprise drop to below 2.7% will be a positive catalyst for cryptocurrencies and stocks. That’s because lower inflation will increase the odds of more than three cuts. However, any inflation drop may be temporary as the ongoing California fires and Trump policies could fuel it soon.
The other reasons why crypto may go back up is the hype surrounding Donald Trump’s inauguration and the potential executive order on crypto. His swearing-in will coincide with Gary Gensler’s resignation, which may fuel the crypto industry.
Also, Trump may fulfill his promise to pardon Ross Ulbright, the founder of Silk Road. Third, the FTX Estate will start distributing over $16 billion soon. While many creditors will convert these funds into cash, some will buy cryptocurrencies, which could boost their prices soon.
