Why is the cryptocurrency market falling today?

The cryptocurrency market fell today after a sharp decline in the US stock market after the Chairman of the US Federal Reserve, Jerome Powell, issued a statement regarding interest rates and high inflation.

The price of Bitcoin (BTC) is currently at $22,300, which is a worrying level for investors who believe that a drop below $22,000 will reverse the trend to $19,000. Similar concerns also exist for Ether (ETH), which currently trades at $1,555 and has a key support level of $1,450.

Cryptocurrency market performance, daily timeframe: Coin360

The cryptocurrency market is no stranger to volatility, and in the lead up to the release of key economic reports and the Federal Reserve’s announcement on monetary policy and interest rate hikes, there are generally rapid price movements.

The future of cryptocurrency and stock performance is in the hands of the Fed

On March 7, Fed Chairman Powell suggested that February’s economic data could show a higher-than-expected increase in inflation.

“The latest economic data is better than expected, suggesting that the final level of interest rates is likely to be higher than previously predicted.”

Powell added that:

“If the totality of the data indicated that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Following these statements, the DOW and the S&P 500 fell 1.18% and 1.08%, with BTC returning to $21,927. The expected reaction to the hot inflation report is a higher-than-expected interest rate hike on March 22, as the FOMC wraps up and Powell releases its economic guidance to clarify the size of the interest rate hike.

Ahead of today’s announcement, the market consensus was for a 0.25% rate hike to the target range of 4.75%-5.0%, but that estimate could change in the next two weeks, especially if Powell continues to be hawkish.

In fact, CME Group data showed that market participants expect a higher than 50% probability of a 50 basis point hike until the March 21-22 meeting.

Liquidity woes grow as US cracks down on stablecoin issuers and Silvergate Bank totters

Recent enforcement actions against Paxos and Binance, as well as the recent SEC crackdown on centralized staking, have also prevented a sustained bullish momentum from developing across the market. While some decentralized staking protocols may benefit from recent enforcement actions, the cryptocurrency regulatory environment is still unclear and uncertainty often leads to market volatility.

The cryptocurrency industry and regulators have a long history of disagreements due to various misconceptions or distrust about the real use case of digital assets. The final battle centers on how centralized exchanges (CEX) can use customer funds.

Gary Gensler, chairman of the SEC, issued the following warning:

“If this field has any chance of survival and success, then proven rules and laws protect investors. Don’t keep your hand in the customer’s pocket by using their funds on your own platform.”

The SEC began its latest round of enforcement actions by prosecuting the Kraken monetization scheme on February 9. In the $30 million settlement announcement, the SEC said it accused Kraken of “failing to register the offer and selling their crypto assets as a staking-a-service program,” which the committee said qualified as a securities sale. In addition to the monetary penalty, Kraken agreed to stop operating the monetization scheme.

Enforcement actions also led to the termination of Nexo’s centralized betting program. While some say the staking ban is another nail in the coffin for cryptocurrencies, Coinbase CEO Brian Armstrong has vowed to fight the lawsuit if he is brought to trial. Not all SEC commissioners agreed to enforcement action against Kraken, but the agency announced a new crackdown in the wake of the decision.

On February 13, the SEC issued a notice to Paxos, the stablecoin issuer, claiming that BUSD is an unregistered security. Following the SEC announcement, on the same day, New York regulators ordered Paxos to stop issuing BUSD, which is the third largest stablecoin in the crypto market.

Concerns about Silvergate Bank’s solvency are also affecting prices across the crypto market. Silvergate was one of the major entrances into the cryptocurrency market, and its potential demise could complicate the flow of liquidity across the industry.

Cryptocurrency prices were poised to pull back after a brilliant start to 2023

Bitcoin and the crypto market witnessed a strong start to 2023 with 64% of BTC investors breaking even when the BTC price reached $25,300 on February 21. Even struggling Bitcoin miners saw tremendous growth, with revenues up 50% to $23M, signaling a recovery for the beleaguered industry.

Related: BTC May Need to Drop to $19.3K to Cool Down Bitcoin Profit-taking – New Data

Top crypto investors believe there are more sell-offs on the horizon, with Bitcoin analysts warning of a continuation of the long-term downtrend. There is a “gap” in CME futures below $20,000, and some investors expect the price of BTC to return to that level at some point in the future.

In the meantime, investor risk appetite is likely to remain subdued, and would-be cryptocurrency traders may consider waiting for signs that US inflation has peaked or for a signal from the Fed that smaller rate hikes are possible. A clearer roadmap for regulating the crypto industry would also help boost sentiment across the sector.