October 20, 2021 is another one of those dates that go down in Bitcoin (BTC) history, especially in terms of price. On that date, the largest cryptocurrency on the market reached another all-time high in both reais and dollars. Just over a year ago, BTC closed the 20th at a price of almost $69,517.32, according to the website CoinGecko. In reais, the cryptocurrency reached BRL 385,312, also breaking its all-time high.
BTC appreciation from 01/01/2021 to its historic high (in reais). Source: CoinGecko. When BTC broke that high, the market was still bullish on all the positive events that took place after March 2020. However, as 2021 ended, the year 2022 saw BTC face a harsh price correction and even fall. below R$ 100 thousand. This sharp drop was due to both macroeconomic factors and problems that occurred in the cryptocurrency market as a whole. So, remember some of the factors that led to the strong market bearish period.
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Bankruptcy in sequence
A series of bankruptcies hit the cryptocurrency market in 2022, especially after the month of May, all of which involved large companies or market protocols. The biggest one without a doubt was the bankruptcy of Earth (LUNC), which destroyed billions of dollars in a matter of weeks. A few months before the blockchain collapse, Luna Foundation Guard (LFG) decided to “diversify” the backing of the stablecoin UST (now USTC). For this, the company started buying large amounts of BTC, with the aim of using the cryptocurrency as a backing for the stablecoin. In hindsight, this seemed like a good idea: bolstering UST’s backing with the main cryptocurrency on the market. But the volatility of BTC caused the LFG to run into trouble as the price dropped, leading investors to doubt the Foundation’s ability to hold UST’s backing. As the market grew distrust, UST began to be tested by the market, which wanted to test the stablecoin’s backing. Finally, LFG had to sell BTC on the market to stop the stablecoin from collapsing. But not only did the move fail, it also caused strong selling pressure, deepening the cryptocurrency’s correction. In parallel, the collapse of UST and Terra affected several funds that had positions in the stablecoin or investments in the ecosystem. And cryptocurrency lending protocols also suffered, leading to a chain stoppage of withdrawals on these platforms, which affected the quote.
War in Ukraine
The year 2022 was also the year in which the correlation between BTC and the traditional market grew. That is, the cryptocurrency began to monitor the performance of the equity market, especially the stock exchange. In this regard, many analysts pointed out that BTC was increasingly looking like a tech stock. For many, the BTC “decorrelation” narrative has ended as more companies have started buying the cryptocurrency as a back-up for their cashiers. Over time, this correlation has diminished, but the macroeconomic scenario has also contributed to the decline in the price of BTC. At the beginning of the year, in February, the world faced with shock a new war in Europe, the first in almost 30 years. Mighty Russia decided to invade neighboring Ukraine. Initially, the war favored demand for BTC due to the fact that many Ukrainians who were fleeing the country wanted to take their wealth with them. As the country’s banks froze withdrawals and limited cash movements, refugees turned to buying BTC to escape. In addition, the government of Ukraine has also started to receive donations in BTC – and many people have donated. But the war progressed, risk aversion subsided, and with that the price of BTC was severely impacted with the massive sale of risky assets.
Inflation and interest
In parallel with the unfolding of the war, Europe also had to deal with another dangerous enemy: price inflation. As a result of the money printing carried out in 2020 and 2021, European citizens had to deal with the sharp rise in the cost of living. Over the months, inflation in European countries – inside and outside the Euro Zone – reached record levels that were previously unimaginable. Portugal, for example, had more than 9% inflation, while the “IPCA” in the United Kingdom already exceeds 10%. Turkey has fared much worse, with annual inflation exceeding 80% in 2022. Within a few months, Europe had to deal with inflation rates that were previously associated with countries in Africa or Latin America. And the famine also hit the United States, whose inflation reached a record 9.1% – the highest rate in 40 years. As a result, US and European Union (EU) central banks have had to raise interest rates to prevent inflation from spiraling out of control. The US Federal Reserve (Fed) took the initiative and raised rates first. In just a few months, US policy rates went from 0% to 3.25%, and the Fed plans to make further hikes. In Europe, which had interest rates of -0.5% per year (yes, the EU had negative interest rates), the European Central Bank (ECB) carried out two interest rate hikes, raising it to 0.75%. However, Europeans are still far behind the US, which is why inflation there remains quite high.
Relationship with BTC
The more interest rates rise, the higher the yields on government bonds in these countries, which the market considers low-risk investments. That’s why with every increase in interest, investors rush to send their money to safer jurisdictions, especially the US. However, to do this investors need to withdraw funds from other investments deemed riskier. And in that move, tech stocks and cryptocurrencies took the worst, losing many investments throughout the year. This series of factors combined culminated in the withdrawal of many resources from riskier markets, which caused the devaluation of the price of BTC and cryptocurrencies as a whole. After all, it is the first major global crisis that BTC has faced since its launch in 2009. In the long term, the investment thesis in BTC remains firm, as well as its main fundamentals. It still maintains its scarcity, its security (it cannot be confiscated by governments) and its technology working. But the short-term momentum is still risky and requires more caution, at least until the end of the next halving cycle.
