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Those of you keeping an eye on the cryptocurrency market may have noticed a strange trend these days. As of September 2022, digital coins started rising in value.
This event is surprising for many reasons. After all, ever since the major crypto boom of 2021, the crypto sector has been in decline. Significant players like Bitcoin, Ethereum, BNB, Ripple, and more recently sank to their lowest levels in almost two years. But now they’re suddenly going up again.
Naturally, we got curious about this unexpected crypto rally. If you have also been wondering about it, you’ve come to the right place. In this article, we’ll investigate what is causing crypto prices to go up and how long we may expect this bullishness to persist.
PS: How to navigate and successfully invest in the Crypto Markets!
To understand why cryptocurrencies dropped so much in value over the past year, you need to be familiar with risk appetite.
So, what is risk appetite? It refers to investors’ readiness to put more money into assets that may offer high returns but come with higher risks. Cryptocurrencies are considered a risky asset due to being unregulated and highly volatile. As Immediate Edge notes, “the markets move fast” — meaning, things change rapidly with assets such as crypto, which is what makes them so appealing and so dangerous. Some stocks and futures fall in this category too.
The opposite of risky assets would be safe havens. These investments typically are very stable and predictable, and enjoy greater interest from investors in times of trouble. Common examples of safe havens include gold, the Japanese yen, and to a large extent, the US dollar.
Because the world is currently going through health, economic, and energy crises, the situation has been quite strained. The global economy is overheating from all the stimulus central banks have been injecting into it to support people through these trying times. This, in turn, has pushed inflation to record-breaking heights.
As a result, regulators such as the Federal Reserve have had to change course and start hiking interest rates. Higher interest normally leads to lower inflation, keeping the economy balanced.
But at the same time, investors borrow less money when interest rates go up, making them less interested in risky assets. And this brings us back to cryptocurrencies: when central banks start hiking interest rates, crypto goes down in value due to lower risk appetite.
It’s not a coincidence that the entire crypto market started declining in late 2021, shortly after most tokens reached all-time highs. That period overlaps almost perfectly with the Fed’s announcement of future interest rate increases, echoed by other regulators around the globe.
Currently, however, we see crypto trying to fight its way back up again. The crises haven’t ended — so what’s causing this odd phenomenon?
After all, it was just recently that Fed Chairman Jerome Powell once again repeated that the Federal Reserve would continue with aggressive interest rate hikes to fight inflation. This news should have had the opposite effect on cryptocurrencies.
Nevertheless, it seems that the expectations of market experts and investors have shifted. There are growing hopes that the situation is improving, as indicated by better supply chain statistics. Moreover, the pandemic also seems to pose a lower concern at the moment.
Thus, the market actually expects inflation to resolve on its own. It might not lower to pre-pandemic levels just yet, but if it starts heading down by itself, central banks will have to pause their hawkish measures and let things unfold naturally.
This more favourable outlook toward the global economy has opened the door for more risk. And while investors might not immediately drop everything and rush in, the fact that they are even considering risky investments for the first time in a year speaks volumes.
The positive switch in risk appetite has had an effect throughout the entire cryptocurrency market. Almost all cryptocurrencies have gone up in the first week of September.
Some notable gains over the past week include:
That’s just looking at some of the top cryptocurrencies by market cap. Other tokens have had much more impressive growth:
These are numbers based on data by CoinMarketCap as of September 9, 2022.
Though it’s still too early to estimate the actual scale of the rally, for now, it’s important to note that cryptos like Bitcoin are trading at multi-month maximums at the moment.
Now that you understand the current rally and what’s behind it, the next important question arises — how long will it last?
We understand that some of you have been holding out for such a rally for a long time. You might be wondering if now is not a good time to close your positions and collect your profits. Nevertheless, if you do this now and prices continue rising, you’d be missing out on potential future earnings.
There is no clear-cut answer, unfortunately. We do not want to fill your head with empty promises and declare that the crypto market has recovered once and for all — because we just don’t know whether it has.
Ultimately, it all boils down to optimism. If investors retain their positive mood and indicators continue to suggest that the global economy is recovering on its own, that will strengthen the case in favour of risky assets.
But if the last two years or so have taught us anything, it’s that a new problem can arise when you least expect it. We have seen challenge after challenge appear in a relatively short period, so it almost seems naive to hope this is the end of all our troubles.
For about a year, the cryptocurrency market has been stuck between a rock and a hard place. Many factors have contributed to this. Even though the difficult situation we are seeing in the world at present is not resolved, attitudes are beginning to shift to a more positive mindset.
As a result, most cryptocurrencies have gone up in value. Nevertheless, we urge you to be careful and not get carried away. Stay realistic and manage your expectations, as another downturn can easily occur.
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