Cryptocurrency prices have been in a winter period in the past few months. Bitcoin, the biggest coin in the world, has seen its price crash from almost $70,000 in November to about $42,000 today. Other coins like Ripple, Avalanche, and Ethereum have all dropped. So, here are the three main reasons why cryptocurrencies have dropped sharply lately.
The Federal Reserve is the most important central bank in the world because of the strength of the American economy and the fact that the US dollar is the world's reserve currency.
In the past three months, the Fed hqs changed its tone on inflation and monetary policy. For a long time, the bank was arguing that the current phase of inflation growth was only transitory. That was wrong as prices have continued rising in the past few months.
The most recent data showed that the headline inflation in the US jumped to 7.5% in January. That was the highest it has been in more than 40 years.
At the same time, the labour market has continued to strengthen. Data published this month showed that the unemployment rate is at 4.0% while the economy added near 500k jobs in January.
Therefore, the Fed has hinted that it will deliver at least three interest rate hikes this year. Some officials have also suggested that the rate hikes will be higher than the expected 0.25%.
Therefore, this change of tone explains why Bitcoin and other cryptocurrencies have declined sharply this year. It also explains why the Nasdaq 100 index has moved to a correction zone this year.
Another main reason why Bitcoin price has dropped sharply is geopolitical tensions. The crisis started when Russia started positioning its troops near the Ukrainian border. It has also placed some troops at the Baltic sea.
In multiple statements, Russia has insisted that its goal is not to invade Ukraine. Instead, it argues that its troops are merely doing exercises. And in a statement this week, the defense ministry said that it was pulling some troops back to their home bases.
However, Nato and the United States have pointed to the fact that the number of troops near the border has actually increased. And in a statement on Thursday, Joe Biden said that Russia could invade on short notice.
These tensions have pushed more investors from risky assets like cryptocurrencies and stocks to safe havens like gold and the US dollar.