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Wednesday, May 18, 2022

3 Reasons Why Bitcoin And Rest Of The Crypto Bunch Are In A Freefall

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It was a “bloody Saturday” for Bitcoin (CRYPTO: BTC) and the altcoins, with selling continuing unabated cutting across the cryptoverse.

Cryptocurrencies, which were having a stellar run for much of the year, started showing signs of slowing down ever since most of them peaked in early November.

It was believed at that time the markets were pausing for a breather following the strong run up.

Rate Hike Fears Lead To Selling:  With the Fed relaying the message that it is concerned about rising inflation, fears of an imminent interest rate hike began to take hold. In a rising interest rate environment, speculative assets such as cryptocurrencies lose their appeal.

Omicron Springs In A Nasty Surprise: Subsequently, the markets experienced another pushback in the form of the Omicron variant of the novel coronavirus that was threatening to derail the fledgling post-pandemic economic recovery.

Unraveling Of Leveraged Bets: Cryptocurrencies typically are more prone to volatility due to a host of factors, including low volume that can result in huge asset movements for the same trade size.

Margin trading is also blamed for the high volatility. Leveraged trading of cryptocurrency derivatives, i.e. options and futures, has now become a big business for crypto exchanges. Investors trading on margin, i.e. money borrowed from the exchanges, are required to repay the loan when the price of the cryptocurrency falls below a certain level. This is called a margin call.

On Saturdays and Sundays, investors can’t move money into their accounts as banks are closed over the weekend, and therefore find it difficult to repay the money. Exchanges then have no other choice but to sell the asset to recover the borrowed money.

Once selling pressure sets in, it triggers a cascade of liquidations, sending the asset prices increasingly lower.

At last check, Bitcoin was seen down 10.92% at $48,942.74, although off the low of $42,874.62 in the past 24 hours.

Related Link: What Does Bitcoin’s Historical December Performance Tell About Its Potential Year-end Price?

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