The price of Bitcoin swelled to $20,654 early on Monday, dropping below $18K on Saturday, losing nearly 60% of its value this year, and is creating a ripple meltdown in the cryptocurrency sector. How interest rates play a role.
The story around Bitcoin keeps making seismic shifts that are creating a ripple effect on the cryptocurrency space, as its positive momentum has reversed and is affecting the entire digital coin market.
On Saturday, Bitcoin fell to as low as $17,592.78, dropping below its symbolic level of $20,000 for the first time since December 2020, CNN reported. Bitcoin’s price climbed as much as 7.6% to pass $20,400 and continued upward to reach $20,654.10 by early Monday.
Nonetheless, Bitcoin’s roller-coaster ride and its position as the cryptocurrency leader is having an effect on the stability of the other top coins and the digital currency market as a whole.
The number two digital token, Ethereum or Ether, dipped below its own symbolic level of $1000 over the weekend.
Investors are becoming increasingly skeptical amid Bitcoin’s meltdown, having lost almost 60% of its value this year–37% this month alone.
Several crypto hedge lenders and networks, such as Babel Finance and Celsius Network have said they will suspend customer withdrawals in an effort to stabilize liquidity.
Crypto hedge fund Three Arrows Capital is exploring options including the sale of assets and a bailout by another firm, according to the Wall Street Journal.
Although there are many factors in the weakness of Bitcoin’s price, a large part appears to be attributed to rising interest rates in an inflationary environment, US News reported.
Experts have taken note that Bitcoin and crypto are not alone when it comes to a correlation between price movements and rising interest rates. They are seeing a correlation with stocks such as the S&P 500 and the NASDAQ.
Some risk assessment officers have seen parallels with 2008 and are reflecting concerns of a potential domino effect of bankruptcies and liquidations, particularly among the growing likelihood of a recession.
Investors currently view Bitcoin as a “risk on” asset, but as a recession becomes more likely, apperception could shift to “risk off.”
According to Investopedia: “A risk-on/risk-off is an investment paradigm under which asset prices are dictated by changes in investors’ risk tolerance. In risk-on situations, investors have a high risk appetite and bid up the prices of assets in the market. In risk-off situations, investors become more risk-averse and sell assets, sending their prices lower.”
But the thing to be most aware of, as perceived risk rises, investors will jump from risky assets and move towards safer assets such as U.S. Treasury bonds, high-grade bonds, gold, cash, and other safe havens, accepting lower returns in exchange for downside portfolio protection.