Top cryptocurrencies like Bitcoin, Ethereum, and BNB may be more susceptible to external market factors than some crypto enthusiasts would like to believe. These and other major tokens fell sharply in the first two weeks of April 2022, with the broader crypto market losing almost $400 billion of value during that time. What's worse, analysts say that a "disaster" in the financial markets could send crypto prices plunging even further.
While Bitcoin has moved above and below a price threshold of $40,000 throughout most of 2022, the latest price drop is a reminder to investors that decentralized digital tokens may still react strongly to factors such as inflation, taxes, and overall market performance.
- Cryptocurrencies plunged in the first part of April 2022, dropping about $400 billion in value in the first two weeks or so.
- Although cryptocurrencies are purported to operate independently of many external market influences, recent trends suggest that this may not be entirely true.
- Investors should look to factors such as inflation, Federal Reserve policy, and tax season for potential links with cryptocurrency performance.
External Factors Suggest Influence on Crypto Prices
The most recent cryptocurrency sell-off has coincided with a decline in U.S. stock market futures. These declines may be attributable to news that March marked an 8.5% year-over-year (YOY) increase in the consumer price index (CPI). Inflation remains a significant concern, and with it the possibility of a recession in the near to medium term. Investors viewing cryptocurrencies as a strong alternative investment during times of market turbulence should watch carefully to see how cryptocurrency prices move as the Federal Reserve works to curb inflation.
Tax Season Impact?
The recent slump in cryptocurrency price levels may also be due in part to tax season. In a majority of recent tax seasons, from January through March, Bitcoin has fallen. While this could be a coincidence, some analysts suspect that Bitcoin tends to underperform in the first months of the year relative to other months because investors who realized major gains in crypto assets during the previous year tend to sell some of their holdings to cover anticipated tax liabilities. This is complicated by the disparate ways that jurisdictions treat capital gains.
Federal Reserve Policies
As analysts expect the Federal Reserve to increase interest rates and borrowing costs, investors in the crypto space may want to watch for signs that economic demand is suffering. This may be felt most prominently in traditionally riskier areas like cryptocurrency. Rising bond yields could also minimize excess return that investors could achieve from cryptocurrencies relative to safer bets like bonds. Combined with persistent inflation and other large-scale economic concerns, this shift may cause investors to turn away from cryptocurrencies to safer alternatives. This could be reflected in the price level of digital tokens for those who continue to trade in this space.