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Higher Interest Rates and Regulation Chatter Spells Doom for Cryptocurrencies

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Higher Interest Rates and Regulation Chatter Spells Doom for Cryptocurrencies
  • Cryptocurrency sell-off gathers steam
  • High-interest rates send the dollar higher
  • Risk of government crypto regulation

Cryptocurrencies are plummeting across the board as bounce-backs continue to attract short sellers. Bitcoin, Ethereum, Cardano, and Solana are some of the popular cryptocurrencies on the receiving end amid the broader market sell-off.

There is still no reprieve in sight after months of pounding depicted by double-digit percentage losses from record highs. Bitcoin has already plummeted below the $30,000 level and has struggled to find support above the key psychological level.

Chart showing BTCUSD sell-off

After a solid start to the week, Bitcoin has turned bearish, plunging below the lows of $29,536 as short-sellers try to steer another leg lower. However, with the broader market momentum remaining bearish, the flagship cryptocurrency is at risk of plunging to one-month lows near the $25,574 level.

On the other hand, Ethereum has been under immense pressure in recent weeks, struggling to power through the $2,000 level. The second-largest cryptocurrency by market cap is already flirting with the pivotal support level near the $1700 level.

Chart showing ETHUSD under pressure

A drop followed by a daily close below the $1706 level could be the catalyst to fuel a drop to 15-month lows at the $1300 level. Ethereum has been one of the biggest disappointments in the sector going by ten consecutive weeks of losses.

Solana, on the other hand, has found the going tough ever since it plunged below the $100 level. The coin is already down by more than 80% from all-time lows to 10-month lows of $39 a coin. Additionally, Cardano has struggled to find support above the $0.60 level as the slide below the $1 a coin level continues to attract more short sellers into the fold.

Interest hike factor

Ultra-low interest rates at the height of the pandemic sent the dollar spiraling lower, all but working in favor of cryptocurrencies. In addition, borrowing costs were extremely low, which worked in favor of investors accessing cheap capital that they used to invest in speculative and riskier assets such as cryptocurrencies.

However, with inflation running hot, central banks have been left with no option but to hike interest rates to try and cure the situation. High inflation levels have forced investors to shun riskier investments, with money that could have been invested being used on other pressing matters. Retail investors who were the driving force behind last year’s crypto boom are finally getting a taste of what is likely to happen as interest rates go up.

Cryptocurrencies are bound to remain under pressure as central banks continue to raise interest rates. The US Federal Reserve hiking interest rates by 50 basis points and hinting at another 50 basis points has already triggered dollar strength, all but sending cryptocurrencies lower.

Crypto regulation

Higher interest rates are not the only thing expected to work against cryptocurrencies going forward. Governments getting serious about regulating the sector are one development that threatens to have significant ramifications.

Cryptocurrencies’ popularity has grown in part because of the limited regulation. However, China moving to ban cryptocurrency trading and mining has provided clear hints of what is likely to happen as governments come together to regulate activities in the sector.

Bottom line

The blood bath that started last November shows no signs of fading off. Cryptocurrencies are yet again on the receiving end amid the risk-off mood in the capital markets. Bitcoin, Ethereum, Solana, and Cardano have already edged lower after a stalled bounce back over the weekend. The sell-off is likely to persist in the week as the dollar strengthens across the board.

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