Why are the Crypto Markets falling down? Reasons Behind the Falling Down
In the last several days, we have witnessed a sharp decrease in the cryptocurrency market. It has therefore created a problem among investors, who are afraid of the possibility of losing their money as they purchase the digital currencies. The crypto market has been under bearish grip since it began to melt in the first quarter of the new year due to the inflation rates, liquidity, and the forecast of Fed. Due to such vulnerabilities, major cryptocurrencies have seen their price fall down by multi digits and some even drop down by more than 90%.
However, Bitcoin, which jumped almost by 2 times and now lost by as much as 15%, is called a correction. This correction, during a soaring inflation is considered as a normal phenomenon in the process of rising inflation, as the one we are experiencing now. Besides natural processes that might cause the fall of the cryptocurrency market, several large scale economic events played a significant role.
No More Negative Interest Rates
On March 19 2024, the Bank of Japan (BOJ) had everybody served upside down. It did so by changing the economic strategy. Weren’t they going to lift interest rates by 0.1 pp instead of moving away from their previous 0% (-0.1%).? The major creditor of the world will see its gradual policy rate cut off the stimulus for the first time since the year 2016.
Increasing the radix to the near neutral range boosts costs of borrowing. This causes business owners and investors to get under the influence of hesitancy towards any bold decisions. Different strategies for sustainable growth might be considered instead, and this may imply a slight braking effect on the pace of its economy.
No More Yield Curve Control
In late 2016, the nation of Japan began implementing the Yield Curve Control (YCC) program. The decision was to achieve the yield on long term (10-year) government bonds at zero. In this case, the Bank of Japan (BOJ) accomplished this goal with the policy called the yield-curve control (YCC), where the BOJ buys these bonds whenever its yields go above 0%. The targets of this program were to draw investors’ attention to the risky equity investment that hopefully will help the Japanese economy.
With the YCC program standing removed, Japan’s government bonds would have issue yields. The security should be placed first then investments will go to the safer bonds. In the short to medium term the process of transitioning from the YCC program removes liquidity in the markets outside of Japan. So this has been the case in the past few months, where stocks and cryptocurrency fell day by day.
Japan to stop purchasing ETFs and J-REITs
The BOJ, namely The Bank of Japan, projected the money policy to contain another financial instrument in the form of ETFs and J-REITs which fell through. This uncertainty is due to the fact that this choice will probably rid the Bank of Japan of very loose policies that it’s been using recently. In the past, purchasing ETFs and J-REITs was realized by the central bank for two possible goals. On the one hand, these reallocations are the same as injecting money into scope of options and influencing overall loan rates.
Through this move, the BOJ hoped to express two things. First, it wanted to show that it thought the level of the stock market and the real estate markets was good. Second, it wanted to communicate that this level should better be maintained for an indefinite term. Consequently, many more people will invest their money. There are a number of grounds which provides to the BOJ for this policy change. Regional representatives may seek to re-prioritize conventional techniques of capital management, paying less attention to buying assets and keeping interest rates very low.
Therefore, this highlights the fact that the Japanese bank has been recently performing quite well, which might mean that it doesn’t necessarily require to purchase more assets to support it. Nonetheless, we are not sure what exactly the impact might be in the long perspectives, because of this uniqueness of the strategy, but it would probably render the stock and real estate markets more unstable, add to the investors’ emotions or have nothing to do with the matter unless the BOJ is still holding a large amount of these assets.
US Treasury to Decrease Borrowing Rate
From January to March 2024, the Department OF Treasuries had to take up a $760bn debt to ease its debt burden. Yet, the size of their balance sheet will first shrink by borrowing less for the next three months until the end of June 2024, but the target is around $202 billion. Widely distributed as it is, many economies in the US can expect to witness a cooling effect as opposed to an immediate bottom shift. Markets might slow down a bit.
It happened for November which is still 12 days away, but consumers are looking ahead. This means that they’ve had negative feelings already because of this same reason, and they’re afraid that there might not be enough funds available in the future, which is called a liquidity shortage or a cash deficit.
Decrease in Chinese Net Liquidity Injections
The Chinese central bank, known as the People’s Bank of China (PBOC), is reducing the amount of money it gives out gradually. This change comes after the bank had provided a lot of money to help boost the Chinese economy.
Why are they making this change?
There could be a few reasons for this. One reason could be to control the pace of economic growth, which might otherwise happen too quickly. They might also worry that things are becoming too expensive, so they’re making it harder to get money. Additionally, the PBOC might have other important goals, like keeping the value of the yuan stable or ensuring bank safety.
What could happen because of this change?
This shift could lead to a few outcomes. Instead of lowering interest rates on loans, banks might actually raise them, meaning businesses and people would have to pay more to borrow money. The flow of money being lent out could also slow down, affecting how much businesses can invest and how fast the economy grows. Financial markets might also get more complicated as investors adjust to these new rules.
What’s next?
The PBOC might continue to tighten its monetary policy, controlling how much money is in circulation. What happens next depends on how much money they take out of circulation, how long they do it, and what other rules they put in place. Observers and people involved in the money market pay close attention to this to understand what it means for China’s economy.
After injecting a large amount of money into the economy, the PBOC is now easing up a bit on boosting the money supply. This comes after the economy got a boost from a big seminar held earlier in the year.
Along with the expected decrease in money in March 2024, this change is another factor that could affect the cryptocurrency market’s decline.
Why is Crypto particularly affected?
Cryptocurrency markets are affected a lot by how easily money can be turned into cash. Cryptocurrency is the quickest to change when the market shifts, followed by stocks, then bonds, and lastly, property.
Before Bitcoin’s halving, people who watch Bitcoin’s past behavior know that there’s usually a sell-off.
After the halving, the market dropped, which was expected because major economies are being more cautious. The Federal Reserve’s interest rate is the highest it’s been, so paying off debts is harder. However, I believe both the stock and crypto markets will bounce back eventually.
