Bitcoin dipped below $40,000 for the first time since September, putting it on pace for its worst start to a year since the earliest days of the digital alternative to money.
The original cryptocurrency fell a much as 6% to $39,774 in New York trading, bringing its loss this year to about 14%. The decline is the largest for a start of the year since at least 2012. Ether edged lower, while the Bloomberg Galaxy Crypto Index dropped for a fourth day.
“Cryptocurrencies are likely to remain under pressure as the Fed reduces its liquidity injections,” said Jay Hatfield, chief executive of Infrastructure Capital Advisors. “Bitcoin could end 2022 below $20,000.”
Bitcoin was created in the wake of the 2008 global financial crisis by an anonymous individual or group that went by Satoshi Nakamoto. It first began trading in 2009 and pricing information from during the early days is limited.
Bloomberg Intelligence’s Mike McGlone said $40,000 is an important technical support level for the digital token. Cryptocurrencies are a good barometer for the current reduction in risk appetite. But he projects that Bitcoin will eventually come out ahead as the world increasingly goes digital and the coin becomes the benchmark collateral.
The Covid-19 pandemic helped Bitcoin break further into the mainstream as institutions and retail investors got involved with the crypto market and its ancillary projects. Now that the Federal Reserve has turned more hawkish, riskier assets like stocks and digital assets have suffered.
“Tighter Fed policy affects not only interest rates but the equity risk premium as the Fed withdraws funds from the capital markets. Riskier investments such as unprofitable tech, meme stocks and cryptocurrency are disproportionately affected relative to the rest of the market since those investments are approximately twice as volatile as the overall market so have double the risk premium as the average stock,” said Hatfield.
Noelle Acheson, head of market insights at Genesis Global Trading, said Bitcoin’s slump appears to be driven more so by short-term traders of the coin than long-term holders.