Stack of Bitcoin and a down arrow

Bitcoin and other cryptocurrencies have been hit with some heavy losses in the past week, with Bitcoin dropping below $31,000 USD ($44,561 AUD). The price drop of the world’s most prominent cryptocurrency is likely a result of the U.S. Federal Reserve’s decision to raise the official U.S. interest rate by 0.5% in an attempt to combat inflation.  

The Fed’s decision to raise interest rates has sent shockwaves across all markets, not just cryptocurrency. Major Asian, European and US indexes have had a significant drop in trade since the Federal Reserve announced its decision.  

In this article, we will be discussing the current market sentiment surrounding Bitcoins latest crash, how geopolitical events have affected the market and how countries like El Salvador are reacting to the dip. 

Fear and greed index 

The Bitcoin fear and greed index measures the market sentiment investors have towards the Bitcoin at any given day. The idea behind the index is that a high level of fear will drive Bitcoin’s price down and excessive greed will see prices rise above what they should be worth. This is an important measurement, as the crypto market is highly reactive to the emotional response of investors.  

The advantage of using the fear and greed index is that it can be used to gauge trends within the market and as a tool for making investment decisions. The fear and greed index also provides valuable insight into potential crypto market cycles, indicating when the price may fluctuate.  

Bitcoin’s fear and greed index is measured by a value of 1-100, with 1 being “extreme fear” (drop in price) and 100 being “extreme greed” (rise in price). This value is based on market volatility, market momentum, social media sentiment, Bitcoins dominance in the market and search trends related to Bitcoin. 

Bitcoin Fear & Greed Index. Source: Alternative.me

As we can Bitcoin’s current market sentiment is incredibly low, with the current value sitting at 12 (extreme fear). This value has been decreasing over the last month with the market’s current decline resulting in excessive fear.  

US Fed raises interest rates to tackle inflation  

The major catalyst for the decline in both the crypto and stock market is likely the U.S. Federal Reserve’s decision to raise the official U.S. interest rate by 0.5%. Though this increase was widely anticipated, it highlights what is to come, as rates are expected to climb by nearly 3% by the end of 2023.  

Given that America has the largest economy in the world, every economic move that it makes typically causes a ripple affect around the globe. If the US Fed makes changes to interest rates, history has shown that other countries almost always follow suit.  

The Fed’s decision to increase interest rates comes as inflation continues to surge to its highest level in four decades.  

Rising interest rates affect the cost of many forms of credit, including mortgages, vehicle loans and credit cards. Higher interest rates make it more expensive for businesses and consumers to borrow money as they having to pay more interest on loans. Consumers and businesses are more likely to wait until a reduction of interest rates before applying for a loan, resulting in the economy “cooling off”. This cool off period reduces the supply of money in circulation, leading to lower inflation rates.  

The rise in interest rates directly affects the crypto market as many investors often sell highly volatile assets, like cryptocurrency, during times of uncertainty.  

Geopolitical crises  

The current conflict between Russia and Russia has seen hundreds of civilian lives lost and more than half a million Ukrainian citizens removed from their homes, forced to live as refugees.  

The war has also had a serious contribution to the market volatility of global stock markets and crypto markets. Major geopolitical events will often cause uncertainty, both in the economy and in investment markets. It’s not uncommon during these times to see businesses and consumers hold off from making any major investment decisions. This can heavily influence whether markets thrive or decline.  

El Salvador buys the dip 

While the recent market dip may have some investors worried, there are some who are using it as an opportunity to purchase Bitcoin and other cryptocurrencies at a discounted rate. El Salvador’s president Nayib Bukele announced that they had “bought the dip”, adding another $15.5 million USD worth of Bitcoin (500 coins) to their balance sheet.  

This is the country’s largest coin purchase since announcing they would be accepting the cryptocurrency as legal tender in September 2021. President Bukele believes Bitcoin could prevent hyperinflation and assist in ending widespread poverty within the country.  

El Salvador’s nationwide adoption of Bitcoin involved launching a virtual wallet service called Chivo that would allow cross-border payments with zero transaction fees.  

Following in El Salvador’s footsteps, the Central African Republic (CAR) recently became the second country in the world to adopt Bitcoin as legal tender.  

Crypto ETFs set to begin trading  

Having previously been delayed, three crypto exchange traded funds (ETFs) have been given the green light to go live.  

They include a Bitcoin and Ethereum spot ETFs from 21 Shares and a Bitcoin ETF from Cosmos Asset Management.  

A crypto ETF is a fund consisting of cryptocurrencies and is usually bought through a public stock exchange. Whilst most ETFs track a basket of assets (I.e stocks), crypto ETF’s track the price of one or more digital assets. They provide a more traditional avenue for institutions and individuals to gain exposure to digital assets. We have already begun to see an increase in interest in crypto among Australians. It is believed that this historic launch of crypto ETFs on the ASX will attract a larger audience of Australian investors to the crypto market.  

Related: Business leaders call for Australia to become global crypto hub.  

Summary 

The last few months have shown us how highly volatile the crypto market can be and how it reacts to major world events. Whilst nobody enjoys seeing their portfolio in the red, we are continuing to see global adoption of cryptocurrencies like never before which provides a positive outlook for the future of the crypto market.  

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