Every other Crypto YouTuber is scouring charts for the next level of Bitcoin support. The largest digital asset by market cap, is currently trading at $33,000 while I write this article. Some analysts anticipate the digital asset could soon reach the $25,000 mark soon. Ethereum is trading at $2400 and is down by 36.45% from a year before.
Even outside of the cryptocurrency markets, the Indian Top 50 Large Cap Index Nifty has slumped to 16,300, down 7.5 percent from a year ago. The S&P 500 Index in the United States is currently trading at 4123, down 14% from a year ago. In a world of increasing inflation and declining markets, retail investors have nowhere to turn.
We have a lot of ground to cover today as we begin our discussion on what led to this level of a market correction. Before we begin, I’m sure many of us have seen or read about interest rate hikes on television or in the news. So what is this all about?
Rising Interest Rates
US Central bank, Federal Reserve lowered the federal funds rate to an all-time low of around near 0 percent. This was done in the hopes of encouraging banks to lend more money to firms and individuals, hence boosting demand in the American economy during a downturn.
- As more money was poured into the system, a little more than $3 trillion to be exact, everyone understood that inflation would eventually bite. Quarterly inflation statements shifted from transitory to persistent price increases.
- People were given stimulus checks to spend money. Because of the increased liquidity, consumers began to buy more goods than they actually produced. In March 2022, the current rate of inflation in the United States was 8.5 percent. Since December 1981, this is the highest level ever.
- The Reserve Bank of India (RBI) attempted something similar in India by releasing a debt relief package worth Rs 20 lakh crore (approximately $300 billion). The Repo Rate was also reduced from 6% to 4% in order to boost lending in the economy. Because of the surplus cash in the economy, businesses borrowed more money, and everything was fine until inflation set in.
Fear of Inflation
As long as things are under control, economists believe that a little inflation is beneficial for the overall economy. Fiat currency is a form of debt with no limit on supply. When an excessive amount of money is printed in a short period of time, demand for products and services rises sharply, and people have more money to invest or spend.
The events of the past two years were the outcome of injected liquidity into the system. Stocks and cryptocurrencies skyrocketed in value as more and more ordinary investors sought bigger returns by investing in riskier asset types. Asset prices skyrocketed all around the world, and corporates began to issue initial public offerings (Initial Public Offerings).
Today in 2022, all of these tech startups, food delivery apps for example are into huge negative returns compared to their listing price. Inflated shares were dumped by private investors into the markets to book profits.
- In an unusual meeting last week, the RBI raised the interest rate by 40 basis points (0.4 percent) and the Cash Reserve Ratio by 50 basis points, citing rising inflation concerns. This was done in order to remove almost Rs 87,000 crore of liquidity from the system.
- In the United States, the Federal Reserve raised the interest rate by 50 basis points (0.5%), bringing the effective federal funds rate to 0.83 percent. To combat the rising threat of inflation, all major economies used similar measures.
Why Markets are affected?
- As US interest rates rose, foreign institutional investors began to liquidate their portfolios in riskier developing economies in order to reinvest in US Treasury bonds. One of the reasons why prices have fallen across sectors is because of the massive sell-off in Indian markets.
- Another explanation for this could be faulty supply chains. Crude oil prices have risen to more than $100 per barrel due to an ongoing worldwide war. This was followed by increased coal and edible oil prices, among other things.
- Last but not the least, an unprecedented hike by RBI has made many retail investors sell off their stocks and book profits.
Bitcoin, Ethereum, Solana, Matic, and BNB, for example, have all had significant price corrections as investors withdraw cash from riskier assets. India has slapped a 30 percent tax on cryptocurrency earnings, plus an additional 1% tax deducted at source. This level of uncertainty, along with hefty taxation, has had a significant impact on the markets, with exchange volumes dropping to an all-time low since 2021.
Rising US Dollar Dominance
As market volatility continues to rise, the Dollar has emerged as an attractive spot for investors to park their money. It has an effect on all other currencies, which are sliding against it on a daily basis.
Bond yields in the United States have climbed, and the US Treasury bond is generally the safest location on the planet to invest large quantities of money. Markets are projected to correct considerably more when interest rates are raised further, based on global attitudes. For those wishing to enter the market for the first time, this could be an excellent time to buy.
To wrap up this post, there are a few things to be aware of.
- Bonds: Primarily we’re talking about Senior Secured A rated bonds issued by NBFCs and Corporates. These can yield anywhere between 7% – 12% a year. If you’re looking for an option to put your spare cash at work, these can be an excellent option to park your capital for short term until markets become a little stable.
- Bitcoin: If it drops below $25,000, probably alts will have their nightmare. Look out for Bitcoin movements and that would affect the overall stability of the Crypto markets.
- Foreign Reserve at RBI: This metric can be looked at through the RBI website. If it’s dropping constantly diversify your money into even safer options including Gold.
- Fear & Greed Index: If markets are bearish, the best time to pick your next good bets is now. As Warren buffet says, be “fearful when others are greedy, and greedy when others are fearful.”
Thanks to Ethereum Push Notification Service
You may have already noticed that we don’t serve any ads on our website. That’s because of awesome projects like EPNS which help us sustain the website. If you don’t know about them already, it’s a decentralized Web 3.0-based notification platform. Unlike Android or iOS notifications, EPNS uses a decentralized approach to send alerts about your activities on DEXs and platforms like CoinDesk, MakerDAO, BTC Tracker, and more.
How to get started?
- Firstly, you’ll need to have a wallet like Metamask, WalletConnect, etc.
- You can then download the EPNS application from Play Store or App Store and sign up using the Wallet ID.
- If you’re like me, a Browser Extension must look like your favorite option.
- Go to the available notification channels.
- Click on “Opt-In” & Sign the popup. It’s free and doesn’t take any gas.
- That’s it.
The best part, EPNS is already working on a Wallet to Wallet messaging service. If you haven’t checked them already go now!