Investors Turn Away from Crypto as Interest Rates Rise and Bitcoin Falls

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In Brief
  • Rising interest rates have turned investors away from riskier assets including bitcoin.

  • Bitcoin’s drop of 27% is much more in line with the tech-heavy Nasdaq’s 22%.

  • Algorithmic stablecoin Terra USD (UST) briefly lost its peg to the dollar over the weekend.

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Rising interest rates amid sluggish growth have turned investors away from riskier assets including bitcoin, which has fallen to a year-to-date low.

Bitcoin dropped to a level not seen since July last year, falling below $33,000. Meanwhile, Ethereum also slipped to a low not seen since last Feb, trading under $2,390. 

This sentiment was also reflected in the greater crypto markets, whose total market capitalization has fallen 4.6% in the past day to $1.6 trillion.

According to Matt Dibb, COO of Singapore-based crypto platform Stack Funds, this rout was partially due to the crypto market’s notoriously low liquidity over the weekends. 

Investors still view crypto as ‘risky’

“I think everything within crypto is still classed as a risk asset, and similar to what we’ve seen with the Nasdaq, most cryptocurrencies are getting pummeled,” he said.

While globally bonds and shares have fallen 10% this year, bitcoin’s drop of 27% is much more in line with the tech-heavy Nasdaq’s 22%. 

Correlations between bitcoin and riskier assets like tech stocks have risen to record levels this year, diminishing the argument that bitcoin can be utilized as a hedge against inflation.

While rising inflation has spurred the U.S. Federal Reserve to raise interest rates, growth remains limited by supply chains still impaired by the pandemic, not to mention Russia’s invasion of Ukraine. 

These factors, in addition to ebbing liquidity and slumping equity markets, have hurt the outlook of more speculative assets including crypto in the near term. 

“The downward trend is likely to continue for the next few days,” said Edul Patel, CEO of algorithm-based crypto investment platform Mudrex, who believes that bitcoin could test the $30,000 level.

Terra stablecoin losing peg

Another immediate influence on this weekend’s slide was algorithmic stablecoin Terra USD (UST) briefly losing its peg to the dollar. The novel way in which Terraform Labs maintains the peg was called into question, which may have contributed to the slide. 

However, plans to build a reserve of $10 billion worth of bitcoin to back the stablecoin means that volatility in UST could potentially spill over into bitcoin markets. 

While the stablecoin recovered, the price of Terraforms Labs’ cryptocurrency LUNA plunged nearly 25% over the weekend.

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage.

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