Cryptocurrencies show signs of life after a bloodbath, but future remains uncertain

• Surging inflation around the world has contributed to the decline in cryptocurrencies over the last few months.
• The last two weeks have been brutal for Bitcoin as its price dropped below $18,000.

After witnessing a bloodbath last week, cryptocurrencies have witnessed a moderate upturn, with both Bitcoin and Ethereum back above the psychologically crucial $20,000 and $1,000 levels.

The last two weeks have been brutal for Bitcoin as its price dropped below $18,000 and now the world’s largest crypto has reclaimed the $20,000 territory. It has jumped by 2.65% and rebounded to over $21,000 as of June 21.

The second-largest cryptocurrency Ethereum also fell below $1,000 on Sunday, down nearly 80% since its all-time-high of in November last year. Mid-week, it was back above $1,100 per coin, witnessing a marginal rebound.

Together, Bitcoin and Ethereum account for nearly 60% of the crypto market share.

Why did the crypto market witness a bloodbath?

Surging inflation around the world has contributed to the decline in cryptocurrencies over the last few months. For instance, inflation is soaring in the U.S. and the Federal Reserve wants to get under control by raising interest rates. Just last week, the Fed increased rates by 0.75%, the single largest raise since 1994.

The surge in interest rates and inflation explosion has resulted in a decline in investor confidence and subsequently, the risk appetite. This reflects in the performance of the equity markets as well, which have seen a similar bloodbath. For instance, the benchmark Nifty 50 index is down over 12% this year, while the Nasdaq composite is down over 30%.

With interest rates surging across the world, investors shy away from borrowing money since the cost is now higher. To avoid additional risk, investors feel hesitant to bet on assets with greater perceived risk, and given the fact that cryptocurrencies carry a much higher risk than even equities, the demand has fallen off a cliff. This reflects in crypto prices.

Is the crypto winter behind us now?

The crypto world has feared a crypto winter for quite some time now, especially after Bitcoin and Ethereum, among others, hit their all-time highs towards the end of 2021.

In regular terms, a crypto winter is what is otherwise known as a bear market. Bear markets are defined as a period of time where supply is greater than demand, confidence is low, and prices are falling.

It is also the time when new investors buy the dip to build their portfolio and reduce the average price of their holdings.

Now that the prices of digital currencies have seen a consistent upward trend this week and the market continues to show resilience, it seems like the future might turn for the better for crypto investors. However, a week is too short a period to say anything for certain, so we will have to wait for a little longer.