Crypto Market Crash: Expert Opinion

Crypto Market Crash: Expert Opinion

Over the past weeks, the cryptocurrency market has faced a massive crash.

YTD (as of Jan 26), Bitcoin (BTC) was down about 20%, while Ethereum (ETH) was down about 30%.

This crash was caused by a number of factors, and a great deal has already been written about it. However, we would like to highlight the three most prominent causes. We asked Eitan Katz,  our CEO, who has seen quite a few rallies and crashes ,about the potential causes, and one factor that may not be the cause.


The “Risk On” sentiment in the traditional markets is affecting crypto.

2021 has been the year of institutions’ adoption of crypto. Institutions’ money flows at record levels, over $9.3B were invested in crypto assets.  The growing involvement of institutions increases their impact on crypto markets – so that when traditional markets suffer from price corrections, fear sentiment is expected to trickle into the crypto markets as well.

 

The Dollar price changes (DXY index)

Traditionally, Bitcoin and the dollar index (DXY) have a reverse correlation.

According to the J.Duncan-Dr K.Dehnad latest research, the stronger the market position of the dollar is, the weaker Bitcoin becomes. Analyzing the Bitcoin price behavior of the last two years, it seems that  “if the Fed hikes (1 hike = 25 bps) are such that growth stocks go into a slump and dollar strengthens significantly, Bitcoin will be adversely impacted”.

Since November, the Dollar index has gone up significantly – a movement that has a pretty high (reverse) correlation with the Bitcoin price changes.

 

The “usual suspects”

Historically, cryptocurrency influencers have been a major driver of the crypto market, causing money to flow in or out. Elon Musk keeps tweeting (Tesla will accept Dogecoin as payment for the brand merchandise); VCs and Crypto-Twitter influencers and market movers do what they always do; but it’s hard to attribute any one cause to the crash in such scale.

At the end of the day, crypto has always been, and continues to be a volatile asset class. It responds to micro events and macro trends and is a high-risk/high-reward market. With the maturity of the market, investment tools like Diverisifi’s products  help investors benefit from the up-side while limiting the down-side.

At Diversifi, we build risk-mitigating tools as part of our effort to enable chain-agnostic financial Web3 applications.

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