- US Fed hiked interest rates to a more than two-decade high
- Higher interest rates make high-risk assets less appealing
- Prices plummet when futures positions build up and there is a large sell-off
The Federal Reserve has indicated there will be further interest rate hikes, which may have been the main cause of the bloodbath, as risky investments do not benefit from high rates. Over a billion dollars’ worth of futures were liquidated in the last 24 hours.
Cryptocurrencies were hard-hit by investor sell-offs on Thursday. Although few of them were major, they ended up draining significant value from the tokens and coins affected. Bitcoin has lost 7% in the last 24 hours, setting the pace for the rest of the market. The second-biggest crypto by market cap, Ethereum, lost 6% in the last 24 hours.
Crypto-related assets were also affected. Riot Platforms shares lost just under 11%.
The aftermath
The US Federal Reserve’s monetary policy has a pronounced impact on digital assets, which is why smart crypto investors watch Fed announcements and actions. On that note, many were concerned and some even upset by news of the most recent Fed policy meeting, which took place last month. The minutes were published on August 16.
The regulator hiked interest rates to a more than two-decade high. The minutes also suggest the Fed might hike rates even further to contain inflation, which is currently the biggest macroeconomic issue. Fed officials are concerned it could flare up again.
Why does it matter?
Higher interest rates make high-risk assets less appealing, and less risky assets – more so. Bonds are a notable example. Conservative investors tend to get higher returns as rates climb. The opposite also holds true: volatile stocks and cryptocurrencies don’t fare well against the backdrop of high inflation.
Other factors: Shibarium, SpaceX, Evergreen
Fed concerns and interest rate hikes were compounded by the launch of Shibarium, a new blockchain, which did not occur without issues. It was officially introduced on August 16, after which users and crypto news platforms reported delays and other problems.
SpaceX’s supposedly dramatic Bitcoin sales, the China Evergreen bankruptcy, and the Grayscale decision may have also had an impact.
Catch 22
When the market is flat, prices can plummet when futures positions build up and there is a large sell-off, especially by a whale. As prices decline, long traders are compelled to sell to avoid liquidation. This adds to the selling pressure and simultaneously creates a Catch 22 of falling prices and efforts to cover long positions.
Interestingly, almost 40% of long position liquidations took place on crypto exchange OKX.
