Since its high reached in November last year, the main crypto asset, Bitcoin has fallen by more than 57%. For many, we would already be close to its minimum. However, what is driving the recent fall in risk assets and Bitcoin has yet to dissipate and is set to get worse.
There is only one financial reason to buy an asset, to get a return. This can come in two ways. Either you have an expectation of receiving cash flows, for example, dividends, or you expect the asset to appreciate in value. With cryptocurrencies, in the vast majority of cases, you only have the second option.
Assets that have this feature have suffered since November last year and are still at risk at this time.
Three movements that are taking place right now and that are expected to intensify in the coming months could bring further devaluation to non-income-producing assets, such as Bitcoin.
The last time interest rates went up in the US, Bitcoin dropped more than 80%. This was in 2018. The chart below shows when Bitcoin dropped from USD$19k to under USD$3,8k.
At the moment, not only are interest rates rising as a result of high inflation around the world, but two other factors can leverage losses.
The American Central Bank (FED) must reverse its monetary expansion program that has promoted intense liquidity around the world. This strong liquidity supported the strong appreciation of risky assets.
In short, money will get more expensive. As a result, leverage, that is, purchases with borrowed resources, should reduce.
This concern about high leverage was highlighted by Martin Arnold in his article published in the Financial Times last Tuesday (24/05): “some crypto exchanges are offering loans to customers to allow them to increase their exposures by as much as 125 times their initial investment” (some crypto exchanges are offering loans to clients, allowing them to increase their exposure by 125 times their initial investment).
With the start of the restriction on this leverage, reduced liquidity and higher interest rates, it is no wonder that we are already seeing some cryptos completely lose their value in weeks. In the last 30 days, one of the top ten cryptos, Terra (Luna) crypto has completely lost its value and its investors have seen the entire application turn to dust.
Considering past examples of the consequence of sharply reduced leverage and rising interest rates, I would not be surprised to see Bitcoin trading below $15K before the end of this year.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
