Thursday brought continued uncertainty to Wall Street, as investors kept trying to consider the ramifications of the Federal Reserve’s latest meeting for the stock market and the economy.
Cryptocurrencies continued to lose value, extending declines from all-time highs several months ago. As the tug of war between crypto bulls and bears goes on, though, the more important question of how average investors perceive the digital asset market remains unanswered.
The drop in Bitcoin can be a double whammy for Bitcoin miners. First, they make their revenue in Bitcoin as compensation for providing mining services to the network. So when Bitcoin goes down, their revenue goes down as well without any real offset to their costs. Given the high levels of fixed cost associated with mining, we could see net income drop dramatically if the current Bitcoin trend continues.
On its face, there wasn’t anything particularly unusual about today’s moves in prices of top crypto assets. Bitcoin (CRYPTO: BTC) was down almost 6% to just over $43,000. Ethereum (CRYPTO: ETH), meanwhile, fell 8% to around $3,425.
There wasn’t anything fundamental that stood out as justifying these steep moves. Rather, investor sentiment seemed to hinge on the perception that crypto asset values will rise and fall with monetary policy, and the Fed’s tightening stance is seen as a threat to further upward moves in Bitcoin and Ethereum.
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What happened to cryptocurrency, Bitcoin prices?
Top cryptocurrencies fell heavily on Wednesday as a broad Nasdaq sell-off continued to run through its second straight day and into a third. The Federal Reserve then proceeded to pour gasoline on the bonfire, promising to shut off spigots of easy money for the economy and raise interest rates as many as eight separate times over the next three years, frightening many investors away from riskier assets such as cryptocurrencies.
Miners aren’t just going to see a negative impact on the income statement if Bitcoin continues to drop; they’ll see their balance sheets get crushed as well, and that should be a concern for investors.
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Why are cryptocurrency prices tanking?
Crypto names heading south for the winter run into the literal dozens.
As markets reopened on Thursday, Solana(CRYPTO: SOL), Terra(CRYPTO: LUNA), and Avalanche(CRYPTO: AVAX) were among the top cryptocurrencies that tumbled — down 10.6%, 9.1%, and 9.7%, respectively, over the past 24 hours as of 9:45 a.m. ET, according to data from CoinGecko.com.
These three are highlighted because, according to the crypto experts at CoinDesk.com, they make up what is called the “SoLunAvax trade,” a group of three cryptocurrencies seen as an alternative to Ethereum(CRYPTO: ETH).
SoLunAvax tokens, notes CoinDesk, have booked gains in the “several hundred percent” range over the past year, as investors sought out alternatives to Ethereum — which was itself up roughly 300% through early November.
So why are these cryptocurrencies falling now? One possible reason is that Ethereum itself is getting cheaper and you don’t really need to buy an “alternative” to Ethereum if the thing you really want is on sale.
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What’s next for cryptocurrency prices?
More concerning than that, though, is a theory raised by CoinDesk toward the end of its report on the SoLunAvax trade. To wit, “over $800 million in crypto liquidations” (i.e., sales of cryptocurrencies) had taken place over the last 24 hours.
And these were no ordinary liquidations, but forced liquidations.
As Binance Academy explains, a forced liquidation in cryptocurrency is akin to a margin call in stock investing. Basically, it means that the same traders who have been “liquidating” these hundreds of millions of dollars’ worth of cryptocurrency did so because they bought cryptocurrency on margin (i.e., they took out loans from their brokers), anticipating that prices would go up. When prices went down instead, their brokers called in their loans, and the traders were forced to liquidate assets to come up with the cash to repay those loans.
Suffice it to say that if CoinDesk is right and we’re starting to see margin calls in the crypto space, then this trend of falling prices begetting margin calls…causing more prices to fall…resulting in more margin calls — well, let’s just say things could get ugly in a hurry.
If you’re one of those unlucky investors who’ve invested in cryptocurrency on margin, the best move right now might be to sell and cut your losses before this mess gets any worse.
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Includes information from Motley Fool reporters Dan Caplinger and Rich Smith