Bitcoin drops at two-year low on FTX collapse

Risk sentiment declined on Wednesday on pessimistic global developments. Uncertainty over the US mid-term elections renewed lockdowns in China, and the collapse of FTX added pressure on crypto markets.

Cryptocurrencies plummeted on Wednesday after the FTX cryptocurrency collapsed on Tuesday and was absorbed by Binance. The FTX token faced liquidity issues, triggering a generalized crypto market sell-off. On Monday, Changpeng Zhao, the CEO of Binance, stated that the exchange will liquidate all the FTT holdings in its books. However, an agreement was reportedly reached later on Tuesday for Binance to acquire FTX and absorb its losses. This development will likely restore stability to crypto markets, which have been plummeting since the beginning of the week.

US election uncertainty also weakened cryptocurrency prices. The US mid-term Congressional elections took place on Tuesday and concerns that the Democratic party might lose control of Congress leading to political instability in the US are promoting a risk aversion sentiment.

Bitcoin price plummeted Wednesday, dropping below the $18,200 level support and below the $17,600 support. Bitcoin dropped below its lowest price since June 2022 to a fresh two-year low below $17,000. If BTC declines, support can be found again at $17,600, while resistance may be encountered at the psychological level of $20,000 and higher up near $21,000. 

Ethereum also continued to decline on Wednesday, dropping $1,190, and is currently testing the support at this level. If Ethereum's price declines, it may encounter support further down at the psychological level of $1,000, while if it increases, resistance may be encountered near the psychological level of $1,500 and further up at $1,660.

Cryptocurrency prices are also pushed down by continuous rate hikes. As central banks raise their interest rates, moving towards an increasingly hawkish fiscal policy, recession fears grow, reducing risk appetite. The US Federal Reserve hiked its interest rate by 75 basis points at its monetary policy meeting last week. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate to 4.0%. 

It is uncertain, however, whether the Fed can continue its aggressively hawkish policy. Market expectations are currently in favor of a 50-bps rate hike in December and a 25-bps hike in January. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate. Thursday’s US CPI print is eagerly awaited by market participants and may cause high volatility in forex markets as well as crypto markets.

BTC/USD 1h Chart

ETH/USD 1h Chart

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Written by:
Myrsini Giannouli

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