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Why is the crypto market down today?

The crypto market is down today, following a sharp pullback seen in the U.S. stock market after United States Federal Reserve chair Jerome Powell issued concerning statements about interest rates and high inflation. 

Bitcoin (BTC) price currently trades at $22,300, a concerning level for traders who believe a dip below the $22,000 level would trigger a trend reversal down to $19,000. Similar worries also exist for Ether (ETH), which currently trades at $1,555 and has a key support level at $1,450.

Cryptocurrency market performance, daily timeframe: Coin360

The crypto market is no stranger to volatility, and generally sharp price moves are seen ahead of the release of key economic data reports and the Federal Reserve’s announcement on monetary policy and interest rate hikes.

The future of crypto and stocks performance is in the Fed’s hands

On March 7, Fed chair Powell suggested that economic data from Feb. could show a higher-than-expected uptick in inflation.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

Powell added that:

“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Following these statements, the DOW and S&P 500 dropped by 1.18% and 1.08% and BTC pulled back to $21,927. The expected response to a hot inflation report is a higher-than-expected rate hike on March 22 when the FOMC concludes and Powell issues his guidance on the economy to explain the size of the rate hike increase.

Prior to today’s statement, the market consensus was a 0.25% rate hike, to the target range of 4.75% to 5.0%, but this estimate could change over the next two weeks, especially if Powell continues to drip out hawkish language.

In fact, CME Group data showed market participants expecting a higher than 50% probability of a 50 basis point hike by the March 21 to March 22 meeting.

Liquidity woes rise as the U.S. cracks down against stablecoin issuers and Silvergate Bank wobbles

Recent enforcement action against Paxos and Binance, plus the recent SEC crackdown on centralized staking have also prevented the development of sustainable bullish momentum across the market. While some decentralized staking protocols may benefit from the recent enforcement action, the crypto regulatory environment is still unclear and uncertainty often leads to market volatility.

The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets. The most recent battle is centered over how centralized exchanges (CEX) can use customer funds.

Gary Gensler, the SEC Chair issued the following warning,

“If this field has any chance of survival and success, it’s time-tested rules and laws to protect the investing public. Don’t have your hand in the customer’s pocket, using their funds for your own platform.”

The SEC started the recent string of enforcement actions by going after Kraken’s earn program on Feb. 9. In the $30 million settlement announcement, the SEC said it had charged Kraken with “failing to register the offer and sale of their crypto asset staking-as-a-service program,” which the commission claims qualified as a sale of securities. In addition to the monetary fine, Kraken agreed to cease earn program operations.

The enforcement action also led to Nexo also ending its centralized staking program. While some are arguing that the staking ban is another nail in crypto’s coffin, Coinbase CEO Brian Armstrong has vowed to fight the action if brought to court. Not all SEC commissioners agreed on the enforcement action against Kraken but the agency announced new crackdowns following this decision.

On Feb. 13, the SEC issued a notice to Paxos, a stablecoin issuer, claiming that BUSD is an unregistered security. Following the SEC announcement, on the same day, New York regulators ordered Paxos to stop issuing BUSD, which is the third-largest stablecoin in the crypto market.

Concerns of the solvency of Silvergate Bank are also impacting prices across the crypto market. Silvergate was one of the primary on-and-off ramps into the crypto market and its potential demise could complicate liquidity flow across the entire industry.

Crypto prices were primed for a pull back after a stellar start to 2023

Bitcoin and the crypto market have witnessed a strong start to 2023, seeing 64% of BTC investors reach profitability as BTC price reached $25,300 on Feb. 21. Even struggling Bitcoin miners saw massive growth, with revenues rising by 50% to $23 million, signaling a recovery for the beleaguered industry.

Related: BTC may need to dip to $19.3K to cool Bitcoin profit-taking — new data

Top crypto investors believe more sell-offs are on the horizon and Bitcoin analysts push warnings of the long-term downtrend continuing. There is a CME futures “gap” below $20,000, and some traders expect BTC price to retrace to this level at some point in the future.

In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that U.S. inflation has peaked, or for the Fed to signal that smaller-sized interest rate hikes are on the cards. A more transparent roadmap for crypto industry regulation would also help to improve sentiment across the sector.