Why Are Crypto Prices Going Down While Everything Else Goes Up?

In early December, the cryptocurrency market saw a big price drop. Information from the crypto-tracking website CoinGecko showed that the price of Bitcoin (BTC), the most famous cryptocurrency, fell below $84,000. This drop caused the total value of all cryptocurrencies to fall below $3 trillion.

This situation is confusing for many experts. Usually, when other investments are doing well, crypto does too. Right now, other investments like stocks and gold are reaching record-high prices. This makes the crypto drop seem very strange.

A Confusing Situation for Investors

Jeff Dorman, a top investor at the firm Arca, called this drop “one of the strangest crypto sell-offs ever.” He explained that the big picture for the economy looks very positive, which should be helping crypto prices, not hurting them.

Here’s what’s happening in the wider economy:

• Interest rates might go down: The central bank of the United States, called the Federal Reserve, is expected to lower the cost of borrowing money, which usually helps investments grow.
• The economy is getting a boost: A process called quantitative tightening, which can slow down the economy, is ending.
• People are spending money: This shows that the economy is strong.
• Companies are earning more: This has helped the price of traditional equities (another name for stocks) and gold reach new highs.

What are Traditional Equities? In simple terms, this means stocks. When you buy a stock, you own a small piece of a company. Wikipedia defines it as all of the shares into which ownership of a corporation is divided.

Dorman also pointed out that the usual scary stories that cause crypto prices to fall haven’t happened. For example, a big company that owns a lot of Bitcoin isn’t selling it, and a major digital dollar called Tether is not in trouble.

So, what’s the real reason for the drop? Dorman thinks it might be simple: even though big investment companies are getting interested in crypto, their money hasn’t actually entered the market yet. At the same time, the people who have been investing in crypto for a while might be running out of new money to put in.

Where Is the Selling Coming From?

In another post, Dorman suggested that the selling might be coming from traditional investors. When these investors need to make changes to their big investment portfolios, they might sell their crypto first. This kind of selling is harder for the crypto community to see and track.

The price drop was made even worse by unexpected news from Japan. The Bank of Japan hinted it might raise its interest rates. This news worried investors who were using a strategy called the yen carry trade. This caused a lot of people to sell their investments at once to pay back borrowed money, a process known as deleveraging. This happened during the holidays when there weren’t many people trading, a situation called “thin liquidity.”

Quick Definitions:

• Yen Carry Trade: This is when someone borrows money in a country with low interest rates (like Japan) and invests it in a country with higher interest rates to make a profit. Learn more on Wikipedia.
• Deleveraging: This is when investors have to quickly sell what they own to pay back money they borrowed. Wikipedia explains it as “the reduction of the leverage ratio, or the percentage of debt in the balance sheet of a single economic entity.”
• Liquidity: This refers to how easily you can buy or sell something without causing a big price change. Thin liquidity means there are fewer buyers and sellers. Read more on Wikipedia.

Is There Good News on the Horizon?

Even with the price drop, there are some positive signs. According to the trading firm Wintermute, the market is actually getting healthier. A lot of the risky borrowing, known as leverage, has been cleared out. The total amount of money in risky crypto trades has fallen from about $230 billion to $135 billion.

Also, more people are now buying crypto directly with their own money (this is called spot trading) instead of using borrowed money. Experts believe this creates a stronger and more stable foundation for the market to grow in the future.

Some people are very optimistic. Tom Lee of Fundstrat predicted in an interview that Bitcoin could reach a new all-time high price by the end of January. He thinks that positive changes in the economy will help both the stock market and crypto recover.

For now, everyone is watching and waiting to see if these improvements will help cryptocurrencies join the big rally that stocks and gold are already enjoying.

Original story by CryptoPotato.