The leading cryptocurrency by market capitalization falls along with traditional markets after Germany’s producer price inflation hit a record high of 37 percent.
Bitcoin (BTC) dropped below $22,000 early on Friday, reversing the gains made after the U.S. Crypto Plunge came in lower than expected last week. This led to a drop in the rest of the cryptocurrency market.
The largest Crypto Plunge by market capitalization fell more than 7% to as low as $21,500, which is the lowest price since July 27. The biggest one-day percentage drop in two months was part of a five-day trend that started near $25,000 and kept going down. Ether (ETH), the native token of Ethereum’s blockchain, fell 6% to $1,730, while SOL, ADA, and DOGE all fell by more than 10%.
Futures for the tech-heavy Nasdaq 100 fell more than 1%, and the dollar index rose to a one-month high of 107.77, which shows that people are afraid to take risks. Shares of companies that deal with cryptocurrency, like miners and the cryptocurrency exchange Coinbase, fell before the market opened.
After the Federal Reserve disagreed with the idea that inflation had reached its peak and that the central bank would slow the rate of interest rate hikes in the U.S. and adopt looser monetary policies in 2023, people’s feelings got worse. The minutes from the Fed’s meeting in July, which were released on Wednesday, showed that policymakers talked about how important it was to keep interest rates at levels that would likely slow down economic growth in the U.S.
“USD strength, especially after the Fed minutes, seems to be putting downward pressure on crypto,” Dick Lo, CEO and founder of quant-driven trading firm TDX Strategies, said. “However, the size and speed of today’s sell-off suggest that it might be a liquidation hunt on complacent, leveraged long positions.”
Matthew Dibb, co-founder, and chief operating officer of Stack Funds, said that crypto is getting hit hard as a risky asset. “Bad inflation numbers from Germany show a lot of macro weakness. The major U.S. stock market indices are down, “he said.
Germany, the biggest economy in Europe and a major exporter, said early Friday that producer prices went up by the most ever. Reuters says that skyrocketing energy prices were the main cause of the 37 percent rise over the past year.
In hopes that the Fed would cut interest rates next year, the price of Bitcoin recently went up from $22,800 to almost $25,000. Stocks also went up. On Wednesday, the Nasdaq reached its highest level in three and a half months, at 13,370. On the other hand, bond yields haven’t changed much since the consumer price index data came out on August 10. This shows that traders might be wrong in their dovish assumptions of a Crypto Plunge. The yield on a 10-year U.S. Treasury note went up to 2.95 percent on Friday, the highest level since July 21. This continued the rise from the low of 2.63 percent after the CPI report.
“After an impressive rally, risk markets were due for a pullback,” Lo said, pointing to profit-taking as one reason for the drop in ether.
Hashdex’s managing director and head of Europe, Laurent Kssis, said that since Wednesday, long liquidations in ether had reached levels that haven’t been seen in two months. According to coinglass.com, ether long positions worth $117 million were sold on Friday. This was the most since July 28. Long liquidations are when exchanges get rid of bullish futures market positions because they don’t have enough margin.
Aside from the reset of risk in traditional markets, the Merge, a long-awaited software update for Ethereum, has also helped crypto markets find their balance over the past two months. Ether’s price doubled in the four weeks leading up to August 14.
Lo thinks that the Crypto Plunge will continue to suffer more if bitcoin can’t hold support at $21,500.
“If the price falls below $20,700, the next level of support could be $20,700,” Lo said. Analysts at ING think that financial conditions will get tighter before the Fed’s September meeting, which could make risky assets more volatile.
Dibb from Stack Funds said that when liquidity is low over the weekend, bitcoin could fall to around $20,000.
