Bitcoin drops below $20,000 on Fed chief's hawkish comments

Low interest rates are one of the catalysts for pushing investors into cryptocurrencies

The crypto market, which includes currencies such as Bitcoin, pictured, has lost $2 trillion of its value in six months. Unsplash

The price of Ethereum, the second largest cryptocurrency by market size, has fallen by 70 per cent this year. Investors and analysts are watching to see if it will dip below $1,000. Unsplash

Dogecoin, supported by Elon Musk, is about 90 per cent down from May last year, yet it is outperforming Bitcoin and Ethereum in the current crash. Unsplash

The government of El Salvador has invested $105 million in Bitcoin. President Nayib Bukele's embrace of the cryptocurrency as legal tender is being questioned as the market crashes. Getty

Changpeng Zhao, founder of crypto exchange giant Binance, has compared the current market turmoil to the dotcom bubble of the early 2000s. Still, the company is aggressively pursuing licensing in international jurisdictions and introducing new products. Getty

Tether is the biggest issuer of stablecoins, a type of cryptocurrency pegged to a traditionally stable asset like the US dollar. Most stablecoins are meant to maintain a constant price of $1 and are backed by real reserve funds, making it easy to convert crypto investments into cash. But Tether's financial statements show that may not be true, leaving the issuer and its investors vulnerable. Unsplash

The recent crypto crash can in part be attributed to the collapse of TerraUSD, a stablecoin pegged to the US dollar through algorithms and linked to a "sister" cryptocurrency named Luna. When the price of Luna plummeted, TerraUSD also fell, creating a “death spiral” to practically zero for both coins. Unsplash

On June 12 crypto lender Celsius Network said it had paused customer withdrawals, saying it needed “to stabilise liquidity and operations”. Investors are still waiting, with no signs that the current meltdown will let up. Getty

Cryptocurrencies mirrored global markets and declined after US Federal Reserve chairman Jerome Powell warned against prematurely loosening policy, with Bitcoin dipping below the bottom end of the narrow range that it has traded in the past two weeks.

“Powell’s admission that there will be pain before there is relief is rather hawkish,” said Josh Olszewicz, head of research at digital asset fund manager Valkyrie Investments.

The largest cryptocurrency by market value shed as much as 3.4 per cent to $19,947.32 on Saturday as of 10.40am UAE time, dipping below $20,000 for the first time since July 14 and extending its rout this year to 57 per cent.

It has traded in a range between that level and about $22,000 for the past week.

Ether slid as much as 5.5 per cent to $1,471.41. Solana and Avalanche fared worse, dropping as much as 6.4 per cent and 6.9 per cent.

Even so, some analysts say that the recent trading pattern presents a buying opportunity.

Onchain metrics "signal that the price is at the accumulation zone, which has been historically market bottom formations and value investing", CryptoQuant said in a report on Thursday.

"Friday's break looks important and negative in the short run but should line up with buying opportunities into early September as cycles remain bullish and project higher prices into November 2022," Mark Newton, technical strategist at Fundstrat, said in a note on Friday.

Mr Powell signalled the US central bank is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation, and he pushed back against any idea that the Fed would soon reverse course.

Low rates are seen as one of the catalysts for pushing investors into cryptocurrencies during the coronavirus lockdowns.