Crypto Market Fall – The Influence of Inflation, Rising Rates and the Global Crisis

A particularly tense macroeconomic context

It has not escaped anyone, the crypto market is in crisis. While the total capitalization of cryptocurrencies has been divided by three, in the space of a year, the macroeconomic situation does not seem to help.

In the first place, the war in Ukraine continues and the situation threatens at any moment to become worse than it already is. The health crisis, which is not fully resolved, is also worrying.

On the other hand, the various central banks struggling to contain runaway inflationwhich is keeping the financial markets under pressure.

If a slight fall in this inflation was expected, the figures published last Friday swept away this hope. The consumer price index reached a rate of 8.6% in May in the United States and 8.1% in Europe.

These figures weigh on risky assets. The S&P 500, the benchmark for the American market, has already lost more than 22% from all-time highs of the month of January.

Figure 1: S&P 500 mini future contract price

Financial analyst Vincent Ganne, who speaks weekly on our YouTube channel as well as Monday to Friday on the Grille-Pain, our private Discord group, commented on this situation in his latest video:

“It is therefore a category of assets, which no longer benefits from what was called at the time the TINA, There is no alternative. Back when the money was free, when the rates were low […]. Now, interest rates are going up vertically. […] Inflation is out of control, in the United States, in Europe, at 8%. The market had hope because for a month inflation had slowed in the United States and last Friday that hope was shattered. »

👉 To go further – Find our guide to facing the bear market

How did we get there ?

It is not recent that central banks support growth with low interest rates. But the phenomenon took on a disproportionate scale after the subprime crisis in 2008. The decision-making authorities then had the choice between letting the problem resolve itself naturally, at the risk of seeing countries and companies go bankrupt, or resorting to a money printing policy.

It was this second option that was chosen, leading to negative interest rates and which fueled the financial markets for years with artificially created money.

Some organizations then literally made money by borrowing. because they were repaying less than they borrowed. This money was reinvested, and with a view to diversification, institutions have partly turned to the cryptocurrency market, which has therefore also benefited from this monetary creation.

However, this process fuels inflation, but at a level that was hitherto relatively acceptable. However, the health crisis and the war in Ukraine are two triggers that have put many industries under pressure. The various shortages have allowed inflation to soar even more, highlighting the flaws in the monetary policies implemented so far.

Central banks are now backtracking and raising their rates to counter this inflation. Now that the free money tap is closing, risk aversion is back among institutional investors.

Cryptos being a particularly risky sector, it is therefore one of the first to be abandoned by these investors. Finding themselves at the bottom of the scale, prices then fall through the effect of communicating vessels.

This Wednesday, June 15, the market expects a third consecutive increase in key rates. It will then be interesting to observe the reaction of prices. Thus, as long as inflation is not countered and the geopolitical situation remains under tension, prices will not be able to rise durably.

The crypto market facing this crisis

Since the highs of last November, the price of Bitcoin (BTC) has lost almost 70% of its value.

Bitcoin price

Figure 2 – BTC price in weekly chart

The king of cryptocurrencies therefore more or less defends the prices that had acts as the highest in 2018. It ensued an 85% drop up to $3,000.

Although the episode of Terra (LUNA) last May did not help the situation, the chart in Figure 2 shows that prices did not wait for this to start to deteriorate. Instead, cryptocurrencies suffer from a exacerbated positive correlation to the equity market.

While Wall Street had come to support this last bull run of the crypto ecosystem with its liquidity, the current crisis is creating a massive withdrawal of capital.

Altcoins are paying an even higher price, with devaluations sailing sometimes around 90% from the previous All Time High (ATH) as shown in the top 10 illustration below:

Decrease from ATHs

Figure 3: Percentage drop of cryptocurrencies from their respective ATHs

The consequences of the crisis on the crypto ecosystem

Whether digital assets can qualify as a bulwark against inflation long-term, the short-term shocks clearly show that this category does not yet have safe haven status. This capital flight is not without consequences for the ecosystem.

The first visible impact of the bear market, beyond prices, concerns layoffs. We regularly give examples and will come back to them in more detail soon. But more insidious dangers await certain actors.

The tweet below reports BTC reserves from El Salvador, Microstrategy, Tesla, and Block:

All are at a loss. From just 8% for Block to over 44% for El Salvador.

However, the latter does not seem to be officially worried about it. Alejandro Zelaya, the country’s finance minister, claimed that Bitcoin only represents 0.5% of El Salvador’s national budget and commented on the situation in a reassuring tone:

“When they tell me the Bitcoin fiscal risk for El Salvador is high, the only thing I can do is smile. »

On the other hand, if the price of BTC were to settle permanently below $21,000, MicroStrategy would then facing a margin call on its collateralised loan in bitcoins. And for good reason, with a loan of 205 million dollars, this implies collateral at least twice as high. However, the price of Bitcoin is today halved since this operation, mechanically lowering this collateral proportionally.

The company will therefore have to either strengthen this guarantee or sell part of its position. The use of this last solution would undeniably accentuate the fall. But it’s the first option that CEO Michael Saylor wishes to favor thanks to 115,109 BTC ready to come in reinforcement:

Finally, another point of tension concerns the centralized platforms offering performance, of which Celsius is a telling example. The latter suspended withdrawals to deal with cash outflow many users. Indeed, this trend leads to friction because of funds sometimes lockedthus preventing investors’ payments from being fully honored.

Celsius would have sent several tens to hundreds of millions of dollars from ETH and BTC to FTX, to free up liquidity and allow payments from its users:

In view of all these elements, if we must not deny that the crisis situation is critical, let us remember all the same that the crypto ecosystem is here to last. Evidenced by investment companies that are preparing for the future, such as a16z and its recent fund of 4.5 billion dollars to develop Web3 projects.

Although it is advisable to remain cautious, responsible and methodical, in the face of this situation, it must be remembered that the best deals are usually done in times of uncertainty. However, we must not rush headlong, keeping in mind that while this may be a good entry point, the decline may not be over.

👉 Also in the news – BlockFi lays off 20% of its staff in the face of the market context

Sources: CoinGecko, Bitcoin Price, S&P 500 Future Mini Contract Price, Reuters, Inflation

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About the Author : Vincent Mayor


I timidly discovered the world of blockchain at the end of 2018 during my quest for financial freedom. Initially invested moderately, it was only two years later that I took the gamble of betting everything on the movement that was taking shape then. I then dedicate 2021 to training myself better to acquire more knowledge and seriousness. As I often like to say: I still have a billion things to learn. And what I do know, I want to share with you.
All articles by Vincent Maire.

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