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Bitcoin has dipped as low as $33,000 from almost $69,000 in less than three months amid a broader selloff in risk assets on growing conviction the Federal Reserve will ratchet back its ultra-accommodative policy settings.

The plunge has hit all corners of the crypto ecosystem, from Bitcoin and memecoins to publicly-listed crypto exchanges, with more than $1 trillion in market value erased from the market.

Memories of the last crypto winter -- a term that refers to a sharp slump -- are renewing fears a repeat is currently playing out. Back then, Bitcoin’s price plunged by more than 80% to as low as $3,100 in 2018, and it took more than a year for it to reach another high in December 2020.

Federal Reserve

The Fed Reserve signaled it will start raising interest rates “soon" and shrink its bond holdings after liftoff has begun, moving toward ending ultra-easy pandemic support to fight the hottest inflation in a generation.

The Fed is also considering weighing in on the possibility of the U.S. issuing a government-backed coin, known as a central bank digital currency or CBDC.

White House

The Biden administration is preparing to release an initial government-wide strategy for digital assets as soon as next month and task federal agencies with assessing the risks and opportunities that they pose, people familiar with the matter told Bloomberg. 

The late-stage draft of the executive order details economic, regulatory and national security challenges posed by cryptocurrencies. It would call for reports from various agencies due in the second half of 2022.

The looming threat of intensified regulatory action adds to the risks embedded in the crypto complex. 

Correlation with equities

Crypto’s correlation with equities strengthened in recent weeks as investors reacted to the prospect of tightening U.S. monetary policy by dumping high-priced tech stocks and digital tokens alike. 

Bitcoin’s moves in tandem with the Nasdaq 100 and the S&P 500 reached an all-time high this month, buoying confidence that one of the world’s more volatile major assets could become more predictable in future.

US stocks have suffered bruising losses thus far in January due in large part to unease sparked by the Fed's sharp pivot away from accommodation toward monetary tightening. 

With inputs from agencies

 

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