Why is crypto down today 2022?
On Monday, the price of Bitcoin (BTC) and other cryptocurrencies tumbled to new 2022 lows as investors dumped risk assets in response to persistently high inflation.
Worsening the sell-off, popular crypto lender Celsius paused all account withdrawals and transfers on Sunday night, citing “extreme market conditions.”
As of mid-morning, BTC was down more than 13% over the prior 24 hours, with the benchmark cryptocurrency trading below $24,000, its lowest level since December 2020. Ethereum (ETH) prices dropped around 16% to less than $1,300, while Litecoin (LTC) and Bitcoin Cash (BCH) prices were down more than 13%.
Bitcoin prices are now down 50% year to date and are trading well off their all-time highs around $69,000 in November 2021.
Celsius in Focus
Cryptocurrency lending firm Celsius announced that it would pause all withdrawals, causing a ripple effect in the fragile crypto market. The Celsius crash follows the $60 billion meltdown of stablecoin TerraUSD last month. The events of May have raised legislators’ concerns over the need to regulate the crypto industry, particularly stablecoins.
As one of the largest cryptos in the lending space, Celsius lent $8 billion to clients, with almost $12 billion in assets under management (AUM) as of May.
The crypto operates similarly to a bank, with higher-than-average interest rates, but without the same type of government oversight.
Celsius paused all withdrawals, Swap and transfers between accounts, essentially to curb a “run on a bank” on Monday.
The company released a statement explaining their move: “Our ultimate objective is stabilizing liquidity and restoring withdrawals, Swap, and transfers between accounts as quickly as possible. There is a lot of work ahead as we consider various options, this process will take time, and there may be delays.”
Selling Pressure in 2022
Many cryptocurrency investors have argued that Bitcoin is a new version of gold for the digital era, a potential flight-to-safety investment and hedge against inflation. But price action in cryptocurrencies suggests the market doesn’t seem to see these highly volatile assets as reliable stores of value during periods of economic uncertainty.
Brian Price, senior vice president of investment management and research at Commonwealth, says the path of least resistance in risk assets remains to the downside for now.
“The overwhelming focus continues to be on inflation, rising interest rates and the war in Ukraine,” says Price. “The market is void of major positive catalysts right now, so it is not surprising that we’re starting the week off under pressure.”
Investors are seeking shelter from the potential negative economic impact of the Fed’s tightening, and they just aren’t seeking it in the cryptocurrency market.
What You Need To Know About Crypto Investing
Early investors in Bitcoin, Ethereum and other cryptocurrencies have made a killing. But the cryptocurrency market has a long history of extreme volatility, which is not what investors are looking for in uncertain market conditions.
Bitcoin has had several deep pullbacks of more than 80% throughout its history, most recently in 2018.
Like most other cryptocurrencies, Bitcoin is not tied to physical assets or intellectual property and doesn’t generate cash flow or pay a dividend or interest to investors. Instead, Bitcoin’s price is connected exclusively to supply and demand, making it difficult to assess its fundamental value, experts say.
Berkshire Hathaway CEO and investing legend Warren Buffett recently discussed Bitcoin’s shortcomings at a Berkshire annual investor meeting, telling investors he wouldn’t pay $25 for “all of the Bitcoin in the world.”
“Whether it goes up or down in the next year or five years or 10 years, I don’t know. But one thing I’m sure of is that it doesn’t multiply, it doesn’t produce anything,” he said.
Bitcoin and other cryptocurrencies may eventually see their volatility and correlation to other risk assets die down. Still, the recent price action in the cryptocurrency market suggests the bumpy ride could continue for crypto investors in the near term.
Should You Buy the Dip in Crypto?
When buying the dip, crypto investors should proceed with extreme caution.
When asset prices decline as rapidly as they have in the crypto market over recent days, it can make that coin you’ve had your eye on look like a super deal. But old Wall Street professionals have a rule of thumb that aptly describes moments like this: “Never try to catch a falling knife.”
Using your imagination, you should understand that catching a falling knife—aka “buying the dip”—nearly always ends painfully. That’s not to say that skillful investors can’t make a quick buck trading on heightened market volatility. But the point here is that big, fast market moves can be unsettling for the typical retail investor.