After a fantastic period of rising prices since early 2023, the rise in the crypto market now seems to be slowing down. What is going on? In this article, we take you through the most relevant factors so that you are completely up-to-date.

Impact of the Halving

On 20 April this year, we celebrated an event that only happens once every four years: the Bitcoin Halving. This involves halving the amount of new Bitcoins that may be mined per block. This was the fourth Halving in Bitcoin's history, and by looking at history, we can better understand our expectations.

The reward for producing blocks for the Bitcoin blockchain, called "mining", has been halved. This makes it harder for miners to generate new Bitcoins, making the amount of Bitcoins available scarcer. So at the same time, this also halves miners' revenues.

We see the same thing happening after the past Halving: less efficient miners, who have higher energy costs or use older equipment, for instance, run into trouble because they can mine fewer Bitcoins. They are forced to sell their stored Bitcoins and cut costs by switching off their mining equipment. We can see this in the combined amount of computing power of all computers on the Bitcoin network, called the "Hash Rate", which drops after the Halving. We see this dip in computing power every four years after the Halving. In addition, it is important to note that Bitcoin reached its highest price ever this year, even exceeding the $69,000 of 2021. This makes it attractive for miners to take profits by selling their Bitcoins.

Profit taking

Not only miners, but long-term owners of Bitcoin are also taking profits at this stage of the market. This group of owners, who have often bought their Bitcoins cheaply or are finally breaking even, start selling their accumulated Bitcoins to new market participants. This phenomenon also applies to other cryptocurrencies such as Ethereum (ETH). The selling pressure from both miners and long-term owners is increasing supply in the market, which can lead to lower prices. The reason prices are currently going up and down instead of straight up (or down) is that this group of long-term owners representing the supply of cryptocurrencies in the market is about the same size as the group of (new) buyers representing the demand in the market.

Interest rates

In recent weeks, we additionally saw doubts in the market about the interest rate policy of several central banks worldwide. In their fight against inflation, central banks have raised interest rates to historic levels. Now that we are at a point where interest rate cuts are possible, the timing of these 'rate cuts' is difficult to determine. Central banks want to avoid the risk of resumption of inflation. High interest rates are negative for financial markets, including the crypto market, while low rates are positive.

Some central banks, such as the ECB, have already cut interest rates slightly, but the main central bank, the US Federal Reserve, remains cautious. This uncertainty is creating volatility in financial markets. We do see a lot of positive news on (falling) inflation in the last two weeks, including from the United States. This supports the expectation that the current fluctuations are temporary and that we will soon experience rising rates again.

Is there still hope?

Fundamentally, there is little wrong with the crypto market. In fact, recent price developments are actually good, as they prevent us from falling into a speculative bubble in the short term. Meanwhile, there are many positive developments going on: governments and regulators worldwide are establishing legal frameworks for cryptocurrencies, which is boosting acceptance. Investment in the sector is picking up and this year we celebrated the launch of the Bitcoin ETF in the United States. Soon to follow is the launch of the Ethereum ETF. These types of investment products are suitable for large, institutional investors to enter the crypto market, so these ETFs are expected to further increase demand for Bitcoin, Ether and other cryptocurrencies in the near future, resulting in rising prices.

Conclusion

Although the crypto market is currently going through a period of cooling, the fundamentals remain strong. Halving is having an effect on the market as expected, profit taking by long-term owners and miners is increasing supply, and uncertainty about central banks' interest rate policies is affecting the market. Nevertheless, there are numerous positive developments that lay the foundation for further growth. It is important to maintain a long-term view and realise that volatility is an inherent part of the crypto market.

Stay informed and don't be afraid of corrections; they can be healthy signs of a developing market. Cryptocurrencies have come a long way in a short time and the future remains full of potential. When in doubt: zoom out.

This was a brief analysis of the most relevant factors in the current crypto market. Hopefully, you are now completely up-to-date. For more insights and updates, stay tuned to us on LinkedIn.