Why is the crypto market down today?

The crypto market is down today, as a slew of negative news events weigh on Bitcoin, Ether and altcoin prices. 

After jumping to yearly highs, Bitcoin (BTC) and Ether (ETH) retraced a portion of their year-to-date gains and the primary downside catalyst appeared to be an announcement that the United States Department of Justice would reveal enforcement action against Bitzlato and ramp-up pressure on certain players in the crypto sector.

Volatility in the stock market was accompanied by major tech industry layoffs and comments on interest rate policy by the St. Louis Federal Reserve President, James Bullard.

After initially benefitting from a Consumer Price Index (CPI) print which showed inflation slowing beyond expectations in December 2022, crypto and stocks started up then began cooling as retail data missed expectations.

U.S. crackdown on Bitzlato exchange sends shivers through the crypto market

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. On Jan. 18, the US Department of Justice shuttered Russian exchange, Bitzlato and the initial announcement from the DOJ suggested that strong actions would be taken against the crypto sector, but the message was not specific. This raised fear among crypto market participants and sent the market into a brief downward spiral.

Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.

The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.

While the Commodity Futures Trading Commission (CFTC) has called for clearer regulation, the pace of these changes is unknown.

Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulation or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.

Regulators have recently turned their eyes to Gemini and Digital Currency Group over the Earn program which can further hinder the crypto market. The trial of former FTX CEO, Sam Bankman-Fried may also set a negative precedent against cryptocurrency.

Related: Dogecoin carbon emissions down by 25% following Elon Musk collaboration

U.S. stocks drop as the rally loses steam

Crypto prices are still highly correlated with the Dow and S&P 500. As mentioned earlier, macro and crypto markets rallied after a better than expected CPI report, but lingering concerns about the health of the U.S. and global economy continue to impact both sectors.

The initial CPI hype died down and the disappointing Goldman Sachs earnings report on Jan. 18 at Davos combined with continued tech layoffs weighed on stock prices and most major banks still expect the U.S. to experience a sharp recession at some point in 2023. Goldman Sachs CEO David Solomon remarked on the largest earnings miss in the company’s history:

“In the consumer platforms, we did some things right. We didn’t execute on some others. We probably took on more than we should have, you know, too much, too quickly.”

Top crypto investors believe more capitulations are on the horizon and Bitcoin analysts push warnings of a potential downtrend. 

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 and for the regulatory environment to become more clear.