Crypto investors haven’t been having the best time recently as the prices of digital assets seem to be in perpetual free fall. Today, Bitcoin (BTC) reached a new yearly low of US$15,630, down an eye-watering 78% from its all-time high of just over US$69,000 in November last year.
Ethereum (ETH), the second largest cryptocurrency, has been following closely in Bitcoin’s footsteps as it too treads a seemingly ever-downward path. At the time of writing ETH is changing hands for just US$1,113 apiece, which is only US$73 higher than its yearly low of US$1,040 that it hit back in mid-July.
So, why are Bitcoin & Ethereum down today?
Most of the descending price action plaguing cryptocurrency markets can be directly linked to the recent implosion of FTX. Two weeks ago, FTX was the world’s fourth largest cryptocurrency exchange with an estimated value of US$32 billion.
Now, the exchange has filed for bankruptcy after it was revealed that its CEO Sam Bankman-Fried was using client funds to finance his own shady trading practices, as well as using money to purchase things off the books. The bankruptcy filing has shown that FTX has a US$10 billion hole in its books, with more than a million people around the world being owed money by the collapsed exchange.
The lawyer tasked with cleaning up the mess, John Ray III, said that FTX may be “even worse” than Enron, adding that a “substantial portion” of the assets held by FTX may be “missing or stolen”.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
John Ray II, CEO of FTX
With all of this in mind, it’s no wonder that investors aren’t chomping at the bit to throw their money into an increasingly uncertain and tumultuous crypto market. However, it’s not just the FTX mess that’s driving prices down, there’s also some more ‘macro’ factors at play as well.
Inflation and interest rates take their toll on Bitcoin
Another key factor that’s been driving the price of Bitcoin and other digital assets down over the past few days (and months) is the ever-growing problem of inflation and the interest rate hikes that come along with it.
If we take a quick glance at the Consumer Price Index (CPI) in the US, inflation increased by 0.6% compared to the previous month. The CPI report showed that from this time last year, inflation has grown roughly 8.2% in September, a little more than the 8.1% increase predicted by economists.
Because rising inflation is ‘sticky’, central banks around the world have been raising interest rates to try and bring it down. When they raise interest rates, it makes less risky investments like bonds much more attractive compared to volatile tech stocks or crypto.
Put simply, when money is cheap people pile into ‘risk’ assets like cryptocurrencies, but now that it is more expensive, they’re searching for safer places to store their hard-earned cash.
Contagion fears just keep growing
While the epic implosion of FTX has already been a tough pill to swallow for most crypto investors, there’s growing fears that the impact from the collapse is yet to be fully realised by the total market. Many fear that numerous other firms are also moments away from going under.
One of the largest lending firms in the crypto space, Genesis Global, has spooked the market this morning following news it may soon be forced to file for bankruptcy after failing to raise an emergency loan of US$1 billion.
Market participants aren’t just scared about Genesis, in fact, they’re more worried about its parent company, Digital Currency Group (DCG) which stands to be wiped out by the potential fallout of Genesis declaring bankruptcy. DCG also owns Grayscale, the largest asset management firm in crypto, as well as major crypto news publication CoinDesk.
Investors fear that if Genesis goes belly-up, the contagion effect it would have on its parent company and the broader crypto market may bring about a fresh wave of bankruptcies, driving crypto asset prices down even more further.
All in all, an overwhelming sense of fear has captured the crypto market, and this is primarily why digital asset prices are firmly in the red.
