Over the past week, the cryptocurrency market has experienced massive drops, reaching lows not seen in months.
According to CNBC, Bitcoin plunged below $33,000 on Monday, the lowest it’s been since July, and the entire crypto market lost more than $1 trillion in value.
Why has the value of cryptocurrency dropped so much?
Nick Casares, head of product at PolyientX, a platform for nonfungible token projects, said the landscape of crypto was originally decoupled from the traditional economy, but that has changed dramatically.
A nonfungible token, or NFT, is essentially a piece of data that verifies you maintain ownership of a digital item, from a piece of artwork to a clip of a game-winning shot in an NBA game.
Cryptocurrency drop: Bitcoin, Ethereum among cryptocurrencies losing value amid investor uncertainty
“This time around, we’ve seen a lot more retail investment,” Casares explains, “We also have institutional money in crypto now that has come in a big way. And when that happens, it tends to create a coupling between traditional markets and the crypto market.”
Retail investors are nonprofessional investors who use their money to trade, while institutional investors are often large companies that use other people’s money for trades.
In other words, given the increase in retail and institutional investors, what happens in traditional markets is now likely to affect cryptocurrency markets as well.
Retail investors have easier access to cryptocurrency through apps including Robinhood and Square and they’re most likely to sell off shares at signs of uncertainty, Casares said.
And it has indeed been an uncertain week.
The Fed met on Wednesday to determine whether or not a rate increase would happen to tackle rising inflation and labor shortages.
“Everybody in the markets was nervous and speculating about what might happen there. So interest rate conversations coupled with a rising inflation rate, I think it’s affecting all asset classes,” Casares says.
Stocks fell and Treasury yields climbed with Fed Chair Jerome Powell’s Wednesday announcement that signaled a plan to begin raising interest rates “soon” as the central bank moves to fight inflation.
Steve Ehrlich, CEO of Voyager, a crypto trading company, suggests that the crypto collapse may have stemmed from the tech sector.
“What we’re seeing is risk-off in the tech sector as a whole, and a correlated sell-off with Bitcoin and crypto assets,” Ehrlich says. “Bitcoin just happens to be tightly correlated to the tech sector at the moment.”
Voyager’s Crypto Confidence Survey, which involved 6,000 participants, revealed that 87% of crypto owners say they plan to hold their cryptocurrency for the medium or long term. For the majority of crypto owners, this recent price drop is just a speed bump, according to Ehrlich.
Includes information from the Associated Press
Michelle Shen is a Money & Tech Digital Reporter for USA TODAY. You can reach her @michelle_shen10 on Twitter.