Omicron Variant & Inflation Fears Curtail Crypto Markets

Concerns over the Omicron variant of the coronavirus and inflation news from the Federal Reserve have spilled over into the cryptocurrency markets.

Uncertainty over these issues has caused investors in traditional markets to withdraw from riskier positions, which carried over to more volatile digital assets. At one point over the weekend, Bitcoin plummeted over 20%, falling below the $50,000 threshold to $42,000. Although it recovered to roughly $49,000 by November 5, Bitcoin is currently trading just above $47,000. 

This represents a nearly 20% drop in the past fortnight, bringing Bitcoin’s price and the amount invested in Bitcoin futures down to where they were in early October. The latest figures from Coinglass for open interest across all exchanges fell to $16.5 billion, from $23.5 just last week, and as much as $27 billion on November 10.

“Our expectation is the rest of Q4 will be a hard month; we aren’t seeing the strength in bitcoin that we generally see after one of these crushing days, leverage markets have been completely reset, and open interest within leverage markets has completely reset,” said Stackfunds COO Matt Dibb.

Market concerns

This broad move away from riskier assets was largely triggered by growing concerns over the new Omicron variant of coronavirus pandemic. Fears over the spread of the new variant have renewed travel restrictions worldwide, as scientists try to determine whether current vaccines will be effective against it.

Comments from Federal Reserve Chairman Jerome Powell last week also generated concern over another potential economic slowdown. Powell said the central bank could begin tapering much faster than previously expected, even potentially raising interest rates in the first half of next year. Higher interest rates have shown to diminish the appeal of speculative assets like Bitcoin, with prices falling dramatically after rate hikes in 2017 and 2018.

Margin trading

Heavily leveraged crypto derivatives also contributed to the large selloff, according to Noelle Acheson, head of market insights at cryptolender Genesis Global Trading. She believes a large sell order could have instigated margin calls and liquidations for investors. As prices fell further, exchanges proceeded to close positioning of investors who had bought bitcoin on margin. According to Coinglass, exchanges closed more than $2 billion of long bitcoin positions on Saturday alone.

Leveraged trading of cryptocurrency derivatives has become highly lucrative for exchanges around the world. Some enable users to make oversized bets, up to 20 times the size of the initial investment, with little money down. However, a small move in the wrong direction can then cause an exchange to liquidate clients’ positions upon loss of the initial investment.

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