On Thursday morning, the price of one bitcoin momentarily dipped below $27,000, marking the cryptocurrency's lowest price since 2022. Later in the day, the world's most popular virtual currency recovered and now trades at $28,600. However, this is still 20% lower than a week ago and 57% down than the high in November.
The decline of Bitcoin is part of a larger cryptocurrency sell-off. Ethereum is now down 8% in the last 24 hours and 28% in the previous week. In addition, cardano (down 39%), dogecoin (down 36%), and litecoin (down 32%) have all dropped in value in the last week.
The "Stablecoin" tether lost its peg to the US dollar early Thursday, temporarily plunging to 96 cents, which is potentially ominous for the cryptocurrency industry. Tether is once again trading at $1.
On Thursday morning, Paolo Ardoino, the CTO of Bitfinex, the business that launched tether, tweeted that the company has redeemed $300 million in tether to protect the peg "without a "Not even a smidgeon." He committed to redeem the maximum amount as potential so as to stay the currency' price at par with the dollar.
Tightening financial conditions
Nobody knows why cryptocurrencies fluctuate on a daily basis. However, the larger macroeconomic climate is a potential driver of the bitcoin sell-off.
In late 2021, as inflation raged, the Fed signaled that it would begin to change fiscal policy. The Fed established a reasonable pledge in March by raising the interest rate. Last week, the Fed overstated its target rate by 0.5%, the most significant one-day hike in two decades.
Higher interest rates tend to reduce the value of all assets. The conditions for tightening money have led to a widespread decline within the stock market, with the Standard & Poor's Five Hundred Index down eighteen percent since its peak in December.
High interest rates have a very large impact on speculative assets. The tech-heavy data system index is down twenty-nine percent since its peak in November.
Tesla stock is down forty percent since last November. 2 of its competitors, Lucid and Canoo, are down 71 and 76 percent, respectively, since their peak in November. Canoo recently warned that it may run out of cash before its initial car is manufactured.
The past six months have been tough on "meme stocks". GameStop stock is down 63% from last November, while AMC stock is down seventy-seven percent over a similar period.
All of these assets saw their prices soar in early 2021 because the Federal Reserve and Congress injected record amounts of money] into the economy. Beginning in 2022, the Fed began swinging this method in the opposite direction, drawing money out of the economy to raise interest rates. As liquidity is becoming more and more scarce, people who want money trade in speculative assets to induce it.
Cryptocurrency selling may be understood as part of this broader trend. It must be from above. The Fed indicated that it plans to continue raising interest rates sharply during the returning months.
Tim Lee was a staff member at Ars from 2017 to 2021. In 2021, he launched Full Stack Economics, a freelance email newsletter related to economics, technology, and public policy. You will be able to purchase his newsletter here.