There have been many questions about why the market value of cryptocurrencies fell by 10% between August 14 and August 23, reaching its lowest level in more than two months at $1.04 trillion. The fall signaled a recent substantial decline in the industry. Since the FTX crash in November 2022, this trend has caused the largest liquidations of futures contracts.

This drop is the result of numerous economic issues. Loan rates for people and businesses have increased as interest rates have reached the 5% barrier, and inflation is still above the 2% target, putting pressure on consumer spending and economic growth. Because less money is available for savings, some people may have to sell their investments to pay their expenses on time.

The Federal Reserve will keep interest rates the same or boost them in the upcoming months, given that inflation predictions for 2024 are currently at 3.6% and hourly wages have climbed by 5.5% year over year, the quickest rate since 2020. As a result, a scenario with high-interest rates promotes fixed-income investments, which is terrible for cryptocurrencies.

While the S&P 500 Index is just 9% below its all-time high, inflation has decreased from its highest of 9% to the current level of 3%. This decrease might be a sign of a “soft landing” engineered by the Federal Reserve, indicating that the likelihood of a protracted and severe recession is declining, temporarily undermining Bitcoin’s investment thesis as a hedge.

Factors Related to Why The Market Value of Cryptocurrencies Fell

Given the strong support from BlackRock and Fidelity, investor expectations for approving a spot Bitcoin exchange-traded fund (ETF) were high. These expectations did not work out. However, the United States Securities and Exchange Commission (SEC) continued to postpone its judgment, citing worries over insufficient anti-manipulation safeguards. A significant amount of trade utilizing stablecoins still occurs on unregulated offshore exchanges, complicating problems and casting doubt on the integrity of market activity.

Financial issues have also had a detrimental effect on the Digital Currency Group (DCG). A DCG subsidiary has difficulty paying off a Gemini exchange debt exceeding $1.2 billion. Genesis Global Trading has recently filed for bankruptcy due to losses brought on by the failures of Terra and FTX. If DCG cannot fulfill its obligations, this hazardous condition may force investors to liquidate their shares in the Grayscale Bitcoin Trust.

The market’s problems are being made worse by tighter regulations. Binance and its CEO, Changpeng “CZ” Zhao, have been accused by the SEC of engaging in deceptive business practices and running an unlicensed exchange. The designation of some cryptocurrencies as securities is also the subject of regulatory inquiry and a lawsuit against Coinbase, underscoring the complexity of American securities legislation.

Despite the Worldwide Economic Recession, The U.S. Dollar Keeps Rising

Why The Market Value of Cryptocurrencies Fell

There are also warning signs brought on by China’s slower economy. Due to recent drops in imports and exports, economists have reduced their predictions for the nation’s growth. Compared to last year, foreign investment in China decreased by more than 80% in the second quarter. Unsettlingly, the $390 billion in outstanding debt from private Chinese developers represents a severe threat to the country’s economy.

Investors are inclined to flock to the perceived safety of U.S. dollars despite the possibility of a weakening global economy, which might increase the appeal of Bitcoin due to its scarcity and stable monetary policy. The U.S. Dollar Index (DXY), which has risen from its July 17 low of 99.5 to its current level of 103.8, marking its highest point in more than two months, is a clear indicator of this.

The ebb and flow of numerous economic conditions and regulatory events will continue to impact the cryptocurrency market’s trajectory in the upcoming months as it navigates these complex hurdles.

Finally, instead of focusing on what caused the recent 10% correction, one might wonder whether there’s a reason to justify the rally in mid-July from a $1.0 trillion market capitalization to $1.18 trillion. Such a situation could result from overconfidence following the submission of numerous spot Bitcoin ETF requests in mid-June.