Cryptos face mounting pressure; lack of policy clarity remains a headwind

business-standard.com:

The past two months have seen a spectacular bear market in cryptocurrencies. This comes after a long bull run, which multiplied cryptocurrency market value, pulled in new investors, and led to serious investment houses setting up crypto indices and advising portfolio exposure to digital currencies.

The value of cryptocurrencies peaked early-mid November 2021. Since then, most of the coins have tanked and it is estimated that over $1 trillion worth of market value has been wiped off. Take the two most high-volume assets: Bitcoin has lost 44 per cent from its peak and it’s up about 6 per cent in the last 12 months despite the correction; ethereum has lost 46 per cent but it is still up around 77 per cent over January 2021 levels.

What are the causes of the downturn? First, it’s important to note that cryptocurrencies are anchored to nothing and their prices are purely a function of supply and demand. There is no central agency controlling money supply – it expands by an exact mathematical amount, which is known to all participants. There is no such thing as an interest rate, let alone a policy rate. Unlike fiat currency, cryptos cannot even be benchmarked to the economic performance of the issuing nation.

Hence, these digital assets are driven purely by sentiment. If sentiment is strong, prices can skyrocket as they did through 2020 and 2021. If sentiment is weak, we can see this sort of catastrophic drop. Apart from sentiment being weak, we also have a situation where many crypto-traders may have decided to book profits.

In this time period, global equity markets have also seen corrections, which range 8-10 per cent in most large markets. Those declines are driven by fears, now more or less confirmed by the latest FOMC