Why Bitcoin, Ethereum, and Dogecoin Plunged This Morning

What happened 

The crypto market was rocked early in the day on Friday with prices across the board crashing just after midnight ET. There wasn’t a single big news item about cryptocurrency but rather a few things converging to cause the sell-off. 

Bitcoin (BTC -0.49%) plunged 8.6% in the past 24 hours as of noon ET. In the same time frame, Ethereum (ETH -4.86%) was down 9.3%, and Dogecoin (DOGE -0.87%) fell 14.8%. Prices have stabilized in the past couple of hours, but there doesn’t seem to be an imminent recovery. 

So what 

The biggest news was a 37.2% increase in producer prices in Germany, largely due to a sharp increase in natural gas prices in the country. Energy prices overall have doubled in the past year, and Russia could cut off supply of natural gas ahead of the winter, which would likely lead to even higher prices.

If prices continue to rise, it could cause a recession and/or prompt policymakers to increase interest rates to slow the economy. No matter how you look at it, slower growth and less discretionary spending is being seen as bad news for the crypto market. 

News out of Germany comes a day after U.S. Federal Reserve minutes showed that the central bank doesn’t think inflation is under control in the U.S. So, rate hikes could continue here as a result. 

On a legal front, U.S. officials are suggesting that Celsius Network’s filing for bankruptcy protection undergo a similar investigation as the probes into the Chapter 11 filings of Enron and Lehman Brothers. That could bring further scrutiny and potentially regulation to the industry.

Now what 

There’s a lot going on here, but I think there are two main drivers of the sudden move. First, investors being optimistic that interest rate increases were going to slow down in 2022 may have gotten out ahead of themselves. Not only is inflation not under control in the U.S., it may be just getting started in Europe. 

Also, crypto tends to have a lot of leverage, which can lead to rapid increases or declines in prices. In the past 24 hours, $600 million of positions have been liquidated, including $223 million Bitcoin and $162 million Ethereum positions. That’s like fuel to the decline. 

The good news is that none of these moves fundamentally change the long-term thesis for cryptocurrencies. Developers are still building new businesses for the blockchain, users are still getting used to using crypto and the blockchain, and venture capitalists are pouring money into the space. As long as that continues, the future is bright, but the reality of volatility in crypto can be painful on days like today.