XTB Poland: Will Bitcoin reach $ 10,000?  Challenges in the digital currency market

Digital currencies have been on a downward trend since November 2021, but the last few weeks have been particularly difficult for virtual assets.

Pessimism persists not only among investors focused on the digital currency market, but also among those focused on stock indices, which, in the last six months, have had one of the weakest developments in the history of the stock market.

What is behind the decline? Worrying US economic data on Friday, combined with already affected market sentiment, led to a sharp drop in indices, which also put pressure on digital currencies.

Consumer sentiment has hit record lows and surprisingly high inflation data in the US economy are worrying about a cycle of aggressive monetary tightening by the Federal Reserve.

The appreciation of virtual currencies has coincided with a period of unprecedented relaxed monetary policy, and this is no coincidence.

Beneficiaries of this economic environment have included Bitcoin and other smaller cryptocurrencies, which are losing ground today amid a shift in central bank policy and increased risk aversion among investors.

The theory that Bitcoin is a way to protect value against inflation, which fans of digital assets have tried to promote, has so far proved unfounded, and Bitcoin’s limited supply has proved to be an insufficient argument for appreciation.

Digital currencies, as risky assets similar to technological stocks, tend to be at the forefront of declines when investor sentiment deteriorates.

At the same time, they can gain strong gains when the appetite for risk increases and the feeling improves.

As in the case of equities, valuations of digital assets are mainly determined by market liquidity and the price of money.

Since the summer of 2020, the first factor has been in abundance, while the price of capital has been extremely low. Now things are reversing at an accelerated pace.

As inflation and uncertainty increase, investment opportunities for retail investors diminish. Financial institutions are aware of this and can give up major digital currency purchases until they are assured that the global economy is improving.

Sales caused by the feeling of panic in the past have sometimes generated opportunities in the virtual currency market.

However, there are no events on the horizon that could lead large investors to return to this market in the near future.

What are the main issues in the digital currency market? Inflation and the price of money are not everything. Recent days have also been full of events relevant to this market.

The industry is facing a drop in confidence in digital assets and decentralized financial services promoted in 2021, independent of the banking system.

The collapse of the Moon has “sown” uncertainty among investors, and this sentiment has recently been fueled by problems with the Ethereum network, the suspension of withdrawals from the largest digital asset exchange, Binance, and the blocking of withdrawals and transfers to the Celsius decentralized financial platform.

The platform offered advanced forms of the so-called “DeFi”, ie, among other things, loans in cryptocurrencies or other forms of credit.

At the moment, it seems that the project is in insolvency, and that means losses amounting to billions of dollars.

The digital assets market fears interventions and a broader audit by regulators, which could expose fraud and financial pyramid schemes in the “DeFi” space.

Investor concerns have also been heightened around the second largest cryptocurrency, Ethereum, whose transformation into the highly anticipated version 2.0 has been postponed again by developers.

All this, combined with unsatisfactory economic data and broad corrections in stock market indices, has increased the level of supply in the digital currency market, leading to massive sales.

When do we expect a bitcoin price rebound? Bitcoin is an extremely volatile asset, but in the last 12 years it has offered investors much higher profits than the S&P 500 index or the shares of large technology companies.

The virtual currency market is characterized by “exaggerated reactions”, and price fluctuations of several tens of percent are not uncommon for its participants.

Predicting a minimum now seems extremely difficult, as the market and macroeconomic circumstances are incomparable to previous years.

Bitcoin fell below its 200-week moving average near the $ 22,000 mark, leading to further price declines by tens of percent in previous cycles.

The price of Bitcoin fell by up to 85% during the recessions, and this would mean a drop in the price of close to $ 10,000.

The catalyst for such a move could be the possible collapse of the stable Tether currency, whose capitalization is seven times higher than Celsius and whose foundations are equally questionable.

At the same time, the situation does not have to be repeated. In previous cycles, the involvement of institutions in the digital assets market and the general awareness of participants in the digital currency market have been reduced compared to today’s situation.

However, if central banks signal a more aggressive approach to monetary policy and uncertainty in the broader market fails to find a catalyst for stabilization, the context could trigger further disruptions in the digital asset market.

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