This week’s crypto market downturn caught investors off guard, leading to nearly $20 billion in liquidations. But past precedents suggest prices can rebound.
Ripple (XRP) price plunged to $1.3758, down by 62% from the year-to-date high, erasing all gains made earlier this year. Bitcoin (BTC) tumbled to $106,000, down from the all-time high of $126,500.
The main catalyst for the crypto crash was the slow and then sudden escalation of a trade war between the U.S. and China.
China announced several measures this week, including new tariffs on U.S. ships docking in the country, an investigation into Qualcomm, and new export limits on rare earth metals and magnets.
The latter measure is notable because China controls over 70% of the rare earth industry, and the U.S. manufacturing industry cannot operate without them. In fact, its rare earth controls helped to bring the two sides to the negotiating table in April.
In his response, President Trump announced that the U.S. would implement harsher tariffs on Chinese goods. The U.S. also announced that it would implement export limits on critical software.
Therefore, the new trade war led to panic selling among investors. The Crypto Fear and Greed Index tumbled to the fear zone of 35, while the CNN Money one fell to the extreme fear zone of 25.
There are several reasons why crypto prices may rebound after this crash, just as they did after Trump’s so-called “Liberation Day” in April.
Bitcoin price plunged to $74,500 from the previous all-time high of $109,165. A month later, the coin was up to a new record high of $111,165.
A similar scenario happened between 2020 and 2021. Bitcoin plunged below $5,000 in mid-March 2020 as the COVID-19 pandemic roiled global markets. However, within a year, it staged a dramatic rebound, surging past $60,000 by March 2021 for the first time, driven by renewed investor optimism and institutional adoption.
Meanwhile, whether Trump uses his upcoming trip to South Korea to meet with Chinese President Xi Jinping and de-escalate the trade situation remains to be seen. On Friday, Trump threatened to cancel the meeting.
Investors also expect the Federal Reserve to deliver more interest rate cuts after previously slashing rates by 25 basis points. It may provide more to cushion the economy. Bitcoin, and the cryptocurrency market in general, tends to perform well during periods when the Fed is cutting interest rates.
