Ticker Symbol: BTC, ETH
The Bitcoin/USD exchange rate fell by 0.5% in the morning trading session to take the cryptocurrency below the $19,000 level for the first time since June. Ethereum also fell by 2% to last exchange hands at $1,542. Both cryptocurrencies have given back the gains from the summer, and the total cryptocurrency market capitalization is now below $1 trillion as well. Bitcoin prices are down 23% from the August high, while Ethereum prices are down 22%. On a year-to-date basis, prices for the two currencies are down 59.2% and 58.2%, respectively.
The losses come ahead of Ethereum’s approaching switch from a proof-of-work system to a proof-of-stake system, known in the industry as “The Merge”. The upgrade has recently been rumored to go live soon. The switch would reduce the energy consumption required to mine the currency by close to 99.95%. Experts and developers in the digital currency space have described the event as one of the most significant upgrades in the history of the nascent asset class.
Surging inflation has forced the Federal Reserve to raise rates and withdraw liquidity from the financial system, pushing high-risk assets such as growth-oriented technology shares and cryptocurrencies into a bear market, which is officially defined as a slide of 20% or more from recent peaks. Interest rates have shot up as well, with the U.S. 10-year Treasury Note rate surging to 3.30% as of Tuesday. That would represent a 178 basis points increase in the risk-free interest rate in the market thus far in 2022.
U.S. 2-year Treasury Notes are trading at an even higher yield of 3.49%, up 275 basis points for the year. Furthermore, the war between Ukraine and Russia could push the global economy toward stagflation, which is the phenomena of muted GDP growth combined with soaring inflation. In such an environment, investments that do not generate a cash yield suffer the most from deteriorating investor sentiment. The sharp drop in cryptocurrency prices and souring of investor sentiment has been described as the “Crypto Winter”.
Increased regulatory scrutiny has also impacted risk appetite. The U.S. SEC has recently proposed changes to the supervisory regime of crypto assets such as stable coins, decentralized finance platforms, and currencies. Cryptocurrencies utilizing the blockchain have also not gained widespread adoption for payments, with Bitcoin and Ethereum accounting for fewer than 0.1% of all transactions in the U.S. Higher utility prices for electricity have also curtailed the appetite for the asset class given that mining for them utilizes large amounts of power.
This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.
