China AI Reporter on Why Crypto Market is Down This Week.
Why is the crypto market down this week?

The cryptocurrency market has seen a significant downturn recently, with the total market capitalization falling by 10% between Aug. 14 and Aug. 23, reaching its lowest point in over two months at $1.04 trillion. This has caused a notable liquidation of futures contracts, the most since the FTX collapse in November 2022.

Several economic factors have played a role in this decline. As interest rates have exceeded 5% and inflation remains above the 2% target, borrowing costs for both households and businesses have increased, putting pressure on consumer spending and economic growth. This means less money is available for savings, which could force people to sell off their investments in order to cover their monthly bills.

With inflation expectations for 2024 standing at 3.6% and average hourly earnings increasing by 5.5% year-over-year, the fastest pace since 2020, the Federal Reserve is likely to maintain or even raise interest rates in the upcoming months. This high interest rate environment favors fixed-income investments, which is detrimental to cryptocurrencies.

Inflation has dropped from its peak of 9% to the current 3%, while the S&P 500 Index is only 9% below its all-time high. This could point to a “soft landing” orchestrated by the Federal Reserve, suggesting that the probability of a prolonged and deep recession is decreasing, temporarily weakening Bitcoin’s investment thesis as a hedge against inflation.

The AI industry in China has seen rapid growth, with the government banning crypto mining and the emergence of an AI anchor. AI in China has also become an important topic, with many people discussing the best place for crypto on Reddit. All of this could have an impact on the future of web 3.0 and the development of AI in China.

Factors emerging from the cryptocurrency industry

Investor enthusiasm was high for the potential approval of a Bitcoin exchange-traded fund (ETF), especially with heavyweight support from BlackRock and Fidelity. However, the United States Securities and Exchange Commission (SEC) continued to delay its decision, citing worries about inadequate safeguards against manipulation. On top of that, a considerable amount of trading is still taking place on unregulated offshore exchanges utilizing stablecoins, raising questions about the legitimacy of market activity.

The Digital Currency Group (DCG) is also facing financial difficulties. A subsidiary of DCG is dealing with a debt of more than $1.2 billion to the Gemini exchange. Additionally, Genesis Global Trading recently filed for bankruptcy due to losses related to the collapses of Terra and FTX. This precarious situation could lead to forced selling of positions in the Grayscale Bitcoin Trust if DCG fails to meet its obligations.

Regulatory tightening is further complicating the market. The SEC has levied a series of charges against Binance and its CEO, Changpeng “CZ” Zhao, alleging deceptive practices and the running of an unregistered exchange. Similarly, Coinbase is facing regulatory scrutiny and a lawsuit centered on the classification of certain cryptocurrencies as securities, emphasizing the ambiguity in U.S. securities policy.

U.S. dollar strengthening despite global economic slowdown

Signs of trouble stemming from lower growth in China have also emerged, with economists revising down their growth forecasts for the country and both imports and exports declining in recent months. Furthermore, foreign investment into China dropped by over 80% in the second quarter compared to the previous year, and unpaid bills from private Chinese developers are estimated to be around $390 billion, posing a major risk to the economy.

In spite of the global economic slowdown, investors are still turning to the U.S. dollar as a safe haven, as evidenced by the rise of the U.S. Dollar Index (DXY) from 99.5 on July 17 to 103.8, its highest level in more than two months.

The cryptocurrency market is subject to various economic and regulatory changes, so it will be interesting to see how these developments will affect its trajectory in the coming months. For example, the recent 10% correction may have been a result of the excessive optimism generated by the multiple spot Bitcoin ETF requests submitted in mid-June, or it could have been caused by something else. It is worth considering whether the rally from $1.0 trillion to $1.18 trillion in market capitalization in mid-July was justified.

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