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Why is Crypto crashing and where is it headed?

Why is Crypto crashing and where is it headed?

Cryptocurrencies are off to a bad start in 2022. As many have pointed out over the weeks, all the reasons why it is falling, experts highlight the Federal Reserve’s aggressive move in the November meeting, indicating an accelerated pace of tapering and rate hikes – the main reason behind the big fall.

Big drops in the price of coins like Bitcoin are certainly nothing surprising for longer-term crypto investors, but Jeff Dorman, the chief investment officer at crypto investment firm Arca, suggests there are signs of waning confidence in the stalwart digital asset. “There have been outflows,” Dorman notes. “There’s certainly been a little bit of a cool down in terms of interest in Bitcoin specifically.”

He further notes that everything from Cathie Wood’s ARK Innovation ETF to SPACs, recent IPOs, and Bitcoin are “all getting hammered and they’ve gone pretty much straight down in line with those Fed rate expectations.” The recent crash also put cracks into the argument that Bitcoin serves as a hedge against inflation.

“Regardless of what Bitcoin is supposed to be, it is being traded right now as a macro risk indicator by a bunch of macro funds and governments and traditional financial institutions,” Dorman suggests. “That’s going to dominate the short-term narrative,” though he doesn’t believe that will always be the case.

Meanwhile, Moya argues that diversification trade is a threat to cryptos like Ethereum. Traders opt for other alternatives that can be the next big block-chain like Solana, Polkadot, Cardano, and Avalanche (those coins have also taken a hit lately. He also suggests the global energy crisis and Russia’s threat to ban the use and mining of Bitcoin on Thursday may be “complicating Bitcoin’s attempt to stabilize.”

Moya believes that Bitcoin is likely to remain volatile in the next couple of months, suggesting that from a technical standpoint, it might trade in the $35,000 to $50,000 range during the first quarter of this year. After that, the crypto might find more stable ground after the Fed’s second rate hike this year, and end 2022 in a better spot, roughly around $60,000. Along with that, he also believes that Ethereum shall rebound and trade above $4,000 this year (it’s currently trading around $2,600), but points out it is losing market share in NFTs and it will not be an easy run to $5,000.

Sources from Yuya Hasegawa (crypto market analyst at Japanese crypto exchange Bitbank) and crypto research and data firm Messari see the coin’s potential bottom this year to be somewhere around $28,000, which was roughly its bottom price in 2021.

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Furthermore, Kevin Kelly, the head of markets and macro at crypto research firm Delphi Digital, also expects Bitcoin to be on a bumpier path. He said the key levels they are watching are $35,600 to $37,200, “which represents a potential cluster of liquidations if we breach these levels,” after which “we’d be looking at support” near $34,000. Kelly said they “can’t rule out” a drop to the low $30,000 range, however, “if sentiment continues to deteriorate.”

Meanwhile, others like Dorman don’t see a bigger plunge in the cards for Bitcoin: “If anything,” he argues, “this has been incredibly overblown” given that risk assets tend to perform well during the early stages of rate hiking cycles. He predicts that broadly, most digital assets will rise this year.

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