Although Bitcoin set a new all-time high in 2024, and it seemed the year would be promising for crypto, the market has experienced a downturn in the last couple of months. It’s interesting to note that the Fear and Greed Index (CFGI) for Bitcoin and other assets is neutral or better. Many investors are using this drop to buy Ripple, ETH, or LTC, among others, to diversify their portfolios.
Can the crypto market bounce back soon? To make this forecast, it’s necessary to understand the factors causing this downward trend first. Here are the main reasons why the crypto market is down.
- Regulatory Impact
The crypto market has always had problems with regulations or a lack of a legal framework for these activities. Many digital exchanges implemented the Know Your Customer (KYC) program and other anti-money laundering (AML) requirements to prevent abuse of crypto trading for illicit purposes.
Digital exchanges had to delist some currencies, especially privacy-focused coins like Monero. As governments tightened their crypto policies, some countries even banned digital currencies on their territories. China banned crypto market trading and mining in 2021. The USA uses its Securities and Exchange Commission (SEC) to intensify the control and monitoring of cryptocurrencies, ICOs, and related projects. SEC even filed a lawsuit against Ripple Labs, but the company behind the coin only paid a fraction of the wanted fine.
Many governments are looking for additional ways to increase the taxation rules applied to crypto businesses. Along with stricter compliance rules, these can raise operational expenses, which can negatively affect the crypto market.
- Economic Factors
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According to Forbes, an economy applies the Sahm Rule and starts a technical recession if the conditions are right. This is the initial recession stage that happens if the three-month unemployment rate average is 0.5% or higher than the lowest unemployment rate in the previous year. In August 2024, the US national unemployment rate was 4.2%. That’s a 0.4% jump compared to August 2023, indicating the world’s most powerful economy is on the brink of a recession.
Another factor that shows a global economic decline is the rise of interest rates. The Bank of Japan hasn’t increased them for 17 years, so it’s no wonder that the interest hike led to yen inflation in this Asian country.
Considering the broad economic settings are unfavorable, market stability isn’t at a satisfactory level, which makes investors more cautious and changes their sentiment toward digital assets. Increased interest causes less liquidity and motivates investors to pick assets that have lower risks than crypto. Many traders sell the digital currencies they own and switch them for gold or other more secure options.
- Geopolitical and Global Events
Crypto investments are volatile and largely affected by geopolitical and other global events. The US elections are drawing near, and the close battle between the candidates leaves the market unstable and uncertain at this point. There’s also a question of how crypto and other asset markets would react to a potential winner.
Military conflicts and tensions also have a negative effect on financial markets. The conflicts in the Middle East and Eastern Europe have been ongoing for a while now, which increases crypto asset volatility. Most investors initially react by leaving any high-risk or volatile markets, and crypto fits that criteria. Instead, they look for better alternatives and sell off digital assets for low-risk investments.
- CBDC Developments
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CBDC is an abbreviation for a Central Bank Digital Currency. It is a cryptocurrency whose issuer is the country’s government, most frequently the central bank. The coin usually aims to mimic the value of the fiat currency used in that country. That means you could consider it a digital form of currency used in that territory.
The benefits of CBDC include decreased cost of maintaining the financial system, more affordable international transactions, and extra privacy and accessibility in financial transfers to consumers and businesses.
Nigeria, Jamaica, and the Bahamas already have their CBDCs, and many other countries are considering this option. The governments want to discourage people from paying with cryptocurrencies and encourage them to use CBDCs instead. That poses a competitive threat to existing digital currencies and can lead to their decline.
- Stablecoin De-Pegging Issues
Stablecoins’ primary purpose is to offer reliability in an unstable crypto market. Their value is pegged to another commodity, most frequently a fiat currency like USD. Instead of acquiring fiat money, you can use stablecoins to conduct the transactions you want in the crypto market. The best exchanges to buy Bitcoin offer support for major stablecoins, making them an important consideration in every trader’s strategy.
Unfortunately, these coins aren’t perfect. Many stablecoins have experienced instability and de-pegging, which can largely shake the entire digital asset market. Here are some examples:
- TerraUSD. UST lost its USD peg in May 2022, which led to a huge effect on LUNA, UST’s sister token. The entire crypto market felt the shakes caused by this issue.
- USDT. Although it should mimic the $1 value of USD, USDT plummeted to $0.85 in 2018. Another issue on a smaller scale occurred in 2023 when USDT was worth about 2% less than the expected peg.
- USDC. USDCoin lost 15% of its value in March 2023, which also caused Frax and DAI to drop since they used USDC to back their currencies.
Key Takeaways
The important thing to understand is that the crypto market is volatile. From ever-changing regulations to global events and economic factors, a lot of things can make it unstable and cause a downward trend.
However, the digital currency industry has proved that it can bounce back over the years. The market navigated through the times of crisis well and got back stronger. Bitcoin set an ATH in 2024 after a rough year or two, so who’s to say we won’t see a new record value soon?
