Crypto Correction Happening – Why are Cryptos DOWN?

The past few months have not been easy for the crypto market. However, crypto prices managed to rebound. After falling well over 50% below the $1,000 mark, Ethereum was able to rise by an incredible 40% in the past 30 days. Most cryptocurrencies also managed to rise thanks to a renewed buying power in the crypto market. In the past 2 days though, we noticed a slight crypto correction lower. Is now the time to buy cryptos at cheaper prices or could this mini-rally simply be a “bull trap”?

The Crypto Market is DOWN in the past 24 hours

After hitting a market cap of $1 trillion again, the crypto market started to retrace slightly lower. The market cap dropped to the current $992 billion, or a -1% drop. Most cryptos also saw a significant drop in their market cap. This comes after an extended uptrend since last week. Prices always need to adjust lower before they continue higher. This is mostly due to profit taking, which in turn gives power to the selling side. If you just opened a position, this is not worrisome yet. Traders need to make sure not to use tight stop losses in this specific case.

Crypto market cap for the past 24 hours showing the crypto correction
Fig.1 Crypto market cap for the past 24 hours – Coinmarketcap

Why did the Crypto Correction Happen?

In order to be able to evaluate whether the current recovery phase is lasting or just a bear market rally, the reasons why the markets are currently being sold off must first be shown. Adding to the persistently high inflation, the subsequent increase in interest rates is poisonous for the economy. Rising interest rates not only make the valuation of riskier assets such as cryptocurrencies or tech stocks unattractive, but they also ensure that the money supply in the market grows more slowly. This makes money more expensive (supply-demand), which can lead to deflationary tendencies. Wall Street is therefore particularly afraid of mistakes made by the FED in interest rate policy.

St. Louis Federal Reserve bitcoin

In addition, there are fears that the general economic situation could lead to a recession. Inflation, rising interest rates, broken supply chains, lack of raw materials, and the war in Ukraine. There are enough reasons for a recession. Due to the FED’s aggressive interest rate policy, it is even suspected that the American central bank would deliberately send the US economy into a recession in order to bring inflation under control.

Why are the Markets turning now?

A clear recovery has been observed in the crypto and stock markets for several months now. Especially sold-off cryptocurrencies were able to increase their value significantly again. However, it is difficult to find reasons for this.

Cryptocurrencies benefit from the resurgence of the stock market, which has also risen in recent weeks. This is due to more stable economic indicators than expected. Above all, however, the most recent price development can be traced back to the investment philosophy that Warren Buffett once coined. “Buy when the cannons roar”. This does not necessarily mean the Russian war of aggression, but the general pessimistic mood. Investors are currently more pessimistic than during the Corona crash. Many are now of the opinion that nothing more can happen and build up positions again. The resulting rise in prices then lures less risk-averse investors back into the market.

In addition, risks such as interest rate policy and the coming recession appear to have already been priced in. Investors are now expecting a recession wanted by the Fed, which should curb inflation.

What risks are still in the market?

Despite the recovering mood, there are still enormous risks in the market. Inflation, interest rate hikes, aggressive war, delivery bottlenecks, and the like are now priced in, but the resulting risks and the extent of the recession are difficult to predict. It is also currently unclear how long inflation will last. In addition, the risk of the eurozone is currently hardly being played on the markets. Higher interest rates and inflation are currently causing massive difficulties in southern Europe. The associated government crisis in Italy could burden Europe and the euro for years to come.

Should I buy Cryptos now?

Despite some risks, positions can now slowly be built up again. This means that the cost-average effect can be optimally used, particularly through savings plans. Although not all risks have been priced into the market, the opportunities currently outweigh the risks. While the prices fell, work continued on the relevant crypto projects, and progress was made. The investment case for most cryptos is the same as before the crash – albeit at a cheaper price. If you want to profit from cryptocurrencies in the long term, you can now start entering the market in tranches.

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