bitcoin (USD-BTC) plunged more than 10% to below $40,000 on Friday, with the rest of the crypto market following suit as risk aversion created a downdraft for markets, ahead of the Fed's widely telegraphed plans to raise interest rates.
With Russia's decision to ban crypto assets lights the fuse since the last drop, Bitcoin price movements have become closely tied to technology stocks, which have collapsed for fear of a rate hike. On Friday, the Nasdaq fell deeper into correction territory, after Netflix (NFLX) surprised investors with weaker-than-expected subscriber growth.
Bitcoin has been "hit by another wave of risk aversion in the markets," said Oanda analyst Craig Erlam, sinking below a key level of technical resistance at $40,000, where bulls and bears have battled for days.
Separately, cryptocurrency exchange Kraken pegged its bear case for Bitcoin at $26,300. In its 2022 cryptocurrency market intelligence report, Kraken said that the cryptocurrency market as a whole is not expected to perform as well this year compared to last year, when Bitcoin skyrocketed to a record over $67,000.
Ethereal (ETH-USD), one of the most popular digital currency exchanges that has skyrocketed in popularity thanks to the rise of non-fungible tokens (NFTs), is down more than 12% and is now trading below $3,000. Other smart contract layer 1 tokens like Cardano (USD-ADA), Earth (LUNA1-USD), Moles (DOT-USD), and Solana (SOL1-USD) all passed out by double digits in intraday trading.
โFurther rate hikes will generally cause more pain for risk assets, and especially Bitcoin,โ said Chris Matta, president of 3iQ Digital Assets US. The leading digital currency normally benefits from loose monetary policy, but is now hurt by expectations of a more aggressive Federal Reserve.
According to Matta, even if some investors continue to view Bitcoin as an inflation hedge, the Fed's move to reduce inflation "won't put it at the top of the list" for many cryptocurrency investors.
Regulatory uncertainty and heavier crypto market derivatives fueled by speculation are also weighing heavily on the market. On the derivatives side, close to 200,000 positions were liquidated in the last 24 hours, totaling more than $800 million in losses and growing according to coin purse.
Those selloffs increased the selloff, with 82% on the upside, but Matta argued that derivatives did not cause this drop.
Over the past two weeks, most funding rates on crypto futures have skewed toward the side of short sellers, according to data from The Block Research.
โConsidering the uncertainty right now around aggressive rate hikes, I think we could definitely see more of a sell-off, putting Bitcoin below $35,000 or potentially lower. It's not over yet," Matta added.
Although lauded as one of the key archetypes of last year's crypto boom, institutional investment is often singled out as a major source of crypto's current risk behavior. This class of investors now dominates the market, but according to Steve Kurz, head of asset management at Galaxy Digital, most average financial institutions have yet to deploy capital.
"We haven't seen anything out of the ordinary in terms of negative flows when you think about Bitcoin or ETH," Steve Kurz told Yahoo Finance. "There are questions about whether we're in a bull market or a bear market, but ultimately I think that will trickle down in the moment, but not necessarily in the final decisions that are made."
Within the sector, more liquidations could come from the sale of reserve assets by Decentralized Autonomous Organizations (DAOs) and cryptocurrency miners, he suggested, who potentially must shed more of their funds to cover operating costs.
In one example, since the beginning of December, the OlympusDAO token (OHM-USD) has sold more than 30% of a market capitalization of $4.3 billion to just over $827 million, according to Coingecko.
David Hollerith covers crypto for Yahoo Finance. FOLLOW ME @dshollers.
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