Bitcoin is still in a limbo on Wall Street was still in limbo on Thursday, as investors tried to figure out what the Federal Reserve’s latest meeting meant for the stock market and the economy.
Cryptocurrencies continued to lose value, extending losses from recent all-time highs. The more crucial issue of how typical investors see the digital asset sector remains unsolved while the tug of war between crypto bulls and bears continues.
Why Are The Feds into Bitcoin and Other Cryptocurrency
For Bitcoin miners, the price reduction might represent a double punch. To begin with, they get Bitcoin as payment for performing mining services to the network. As a result, when Bitcoin falls in value, their income falls as well, with no significant balance to their expenses. If the present Bitcoin trend continues, we might see net revenue decline drastically due to the large fixed costs involved with mining.
On the surface, today’s price movements in key crypto assets didn’t seem to be especially exceptional. Bitcoin (CRYPTO: BTC) was trading at slightly over $43,000, down about 6%. Meanwhile, Ethereum (CRYPTO: ETH) dropped 8% to roughly $3,425.
There was nothing basic about these drastic changes that seemed to justify them. Rather, investor mood seemed to be based on the belief that crypto asset prices would rise and fall in lockstep with monetary policy, and that the Fed’s tightening stance will stifle future gains in Bitcoin and Ethereum.
Top cryptocurrencies dropped sharply on Wednesday, as a widespread Nasdaq sell-off entered its third day. The Federal Reserve then added fuel to the fire by threatening to cut off the economy’s cheap money spigots and hike interest rates as many as eight times over the next three years, scaring many investors away from riskier assets like cryptocurrency.
If Bitcoin continues to fall, miners will not only experience a negative effect on their income statement, but their balance sheets will be crushed as well, which should be a worry for investors.
The number of crypto names traveling south for the winter is in the dozens.
According to statistics from CoinGecko.com, Solana(CRYPTO: SOL), Terra(CRYPTO: LUNA), and Avalanche(CRYPTO: AVAX) were among the top cryptocurrencies that fell when markets reopened on Thursday, down 10.6 percent, 9.1 percent, and 9.7 percent, respectively, during the previous 24 hours as of 9:45 a.m. ET.
These three cryptocurrencies are highlighted because, according to CoinDesk.com’s crypto analysts, they make up the “SoLunAvax trade,” a group of three cryptocurrencies considered as an alternative to Ethereum (CRYPTO: ETH).
SoLunAvax tokens have had increases of “several hundred percent” over the last year, according to CoinDesk, as investors searched for alternatives to Ethereum, which was up approximately 300 percent through early November.
So, what’s causing these cryptocurrencies to plummet right now? One explanation may be because Ethereum is becoming more affordable, and you don’t need to purchase a “alternative” to Ethereum if the product you truly want is on sale.
However, a suggestion advanced by CoinDesk at the conclusion of its piece on the SoLunAvax deal is more troubling. Nearly the previous 24 hours, “over $800 million in crypto liquidations” (i.e., cryptocurrency sales) has occurred.
These weren’t just any liquidations; they were forced liquidations.
A forced liquidation in cryptocurrency is similar to a margin call in stock investment, according to Binance Academy. Essentially, it implies that the same traders who have been “liquidating” these hundreds of millions of dollars’ worth of cryptocurrencies have done so because they purchased cryptocurrency on margin (i.e., they borrowed money from their brokers) with the expectation of higher pricing. When prices fell instead, their brokers called in their loans, forcing the traders to sell assets in order to repay the debts.
To summarize, if CoinDesk is correct and we’re seeing margin calls in the crypto industry, this pattern of dropping prices begetting margin calls…causing more prices to fall…resulting in more margin calls…well, let’s just say things might get nasty fast.
If you’re one of the unfortunate investors who bought cryptocurrencies on margin, the best course of action right now may be to sell and limit your losses before the situation worsens.
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