crypto prices crash

Crypto prices across the board have fallen today as geopolitical tensions rise and capital allocators move to US dollars as a “risk-off” bet in times of turbulence.

Crypto prices continue to fall

Since the peak of the market in November of 2021, the crypto markets have consistently fallen with only a few brief relief rallies that provided more exit liquidity for people to close their positions.

There have been all sorts of reasons for this.

First, the failure of several well-known companies, like Celsius, 3AC, and Terra, led to massive amounts of cryptocurrencies being sold off in the market, causing a chain reaction of liquidations. For LUNA, a price drop of 99.99% in just a few days sent shockwaves through the industry (a situation that is ongoing).

Moreover, all markets happen within a larger macroeconomic context, and the context of 2022 is one of rising interest rates, rising inflation, war in Europe and energy uncertainty – none of this is a good thing for “risk-on” assets.

Has the UK Chancellor lost control of the economy?

The new Chancellor of the Exchequer, Kwasi Kwarteng, has come under fire for losing control of the UK economy, particularly from those who sit on the opposition benches.

At the Labour Party conference this week, both Keir Starmer and Angela Rayner made the claims that the Conservative government has completely lost control of the economy.

UK citizens are currently being forced to contend not only with rising inflation, but also a cost of living crisis given the high cost of heating (which ought to become more problematic throughout the winter).

The new Chancellor’s recent decision to cut the top rate of income tax, amidst a few other reforms, was initially seen as a good thing, particularly by conservative supporters.

However, over the past few days the markets have responded, and sterling has continued to decline significantly against the US dollar.

There are now concerns that sterling could even fall below the value of the dollar, something which happened to the euro only recently.

All of this uncertainty has been extremely problematic for the British economy, and particularly for the new Prime Minister, Liz Truss.

The British economy plays a key role in the cryptocurrency market, and in the past 48 hours, Binance has seen record highs in trading volume, especially for the GBP/BTC pair. This indicates that British investors are worried about the fluctuations in traditional currencies and are starting to see Bitcoin as a safe option.

Crypto remains correlated with stock markets

Cryptocurrencies, particularly larger cap cryptocurrencies that are more established, continue to remain highly correlated with stock markets, moving directionally in tandem even if by different magnitudes thanks to the higher degree of volatility that one can expect with smaller market caps.

There is some hope that, if Bitcoin’s market cap were larger (and it was thus more liquid) there would be a chance for capital allocators to look to Bitcoin as more of a “risk-off” asset.

The legendary investor Stanley Druckenmiller has made the case that the high degree of quantitative easing during the last few years has caused a bubble in asset prices, and that the deleveraging of this will be extremely difficult for markets to contend with.

The fact that he doesn’t think there needs to be a black swan for this turmoil to unfold ought to be extremely concerning, and investors holding “risk-on” assets ought to be cautious moving forwards, particularly if they are trying to conserve capital over the short to medium term.

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