Every day, the price of cryptocurrencies hits a new low. The largest cryptocurrency in the world, Bitcoin, has dropped to $20,407, its lowest level in 18 months (June 15, 2022). It has decreased by almost 60% so far this year. Ethereum, the second-largest cryptocurrency, dropped more than 25% to $1,040 in the meanwhile. After reaching $3 trillion in market capitalization in November of last year, the value of all cryptocurrencies has decreased by more than $2 trillion. Nearly all popular coins are now worth half as much as they did at their peak.
According to CoinMarketCap, the global cryptocurrency market has decreased from $1.02 trillion to $983.72 billion, an 11% decline. Recently, all of the main cryptocurrencies have been trading in the red, putting even long-term investors to the test. Here, we list every cause of the significant cryptocurrency market drop.
Why do cryptocurrencies crash?
Numerous factors might cause cryptocurrencies to collapse. Analysts contend that the decline in the value of stocks and other assets resembles the present catastrophe. The stringent monetary policies that central banks have implemented to combat inflation are to blame for this. Less money is available to be spent on assets like cryptocurrencies when these funds lower the funds accessible in the markets with high-interest rates. Numerous nations have also taken several measures to prevent the widespread usage of cryptocurrencies. While some, like China and Russia, have openly outlawed them, others, like India, are attempting to severely tax and regulate them.
The Indian government added a 305 tax on all virtual and digital assets in the budget for 2022. Governments and central banks are leery about cryptocurrencies for similar reasons. These currencies put into question the ability of governments to finance their projects by printing new money as well as the authority central banks have over a country’s currency. Some observers believe that the decline of cryptocurrencies is the result of a bubble collapsing. They claim that these assets’ value increased to statistical levels only due to speculation and not for any actual use.
The top five explanations as to why cryptos prices are declining are
Luna-Terra disaster
After the Luna-Terra debacle, everything began. It was an incident with serious repercussions for both its investors and the overall crypto economy. A stablecoin called Terra coin, which had a market capitalization of more than $18 billion before the crisis, caused many investors to lose all of their life savings. Stablecoins are largely used by cryptocurrency investors to quickly enter and exit the fiat market without the need for a third party (in this example, a bank) to authorize these transactions. Stablecoins are designed to be valued at parity with the US Dollar or another fiat currency. There are many stablecoins on the market, including, to name a few, Binance USD (BUSD), USD Coin (USDC), and Tether (USDT). Three of the aforementioned stablecoins are issued by the central bank and tied to the USD. These organizations own a fund of dollars that backs each coin to $1 in the form of cash reserves or commercial papers/receivables. Terraform Labs (the business behind Terra) devised a strategy to sell all of its Bitcoin reserves to restore the peg to $1 when Luna lost 99.9% of its value, but ultimately failed to do so. As a result, the market for cryptocurrencies lost more than $40 billion.
The stock market
The equities market and the cryptocurrency market are related. The cryptocurrency market is experiencing a similar downward trend as the stock market. The same forces that influence the stock market also impact the price of cryptocurrencies. According to a New York Times analysis, the price changes of Bitcoin closely track those of the Nasdaq, a benchmark that is skewed toward tech firms. Although cryptocurrency markets should ideally operate independently of conventional markets, they have historically been responsive to changes in the mainstream financial sector.
The New York state department of financial services released a regulatory advisory for dollar-backed stablecoins declaring algorithm-based stable coins cannot be issued in the New York states and other states are likely to follow such regulatory guidance.
Interest rate increase
The US Federal Reserve has agreed to raise interest rates to curb inflation. The rate of inflation has reached 8.6 percent, which is comparable to the greatest level in the previous 40 years. According to a Wall Street Journal story, the Fed will employ an aggressive plan to raise the cost of debt, reduce spending, and control record-high inflation. A leading recession indication is frequently considered to be the aggressive increase in interest rates. US Treasury secretariat Janet Yellen cautioned that cryptocurrencies are dangerous investments and that she would not advise using them in the increasing number of retirement plans.
Celsius Network
In response to “extreme market conditions,” Celsius Network, a Decentralized Finance, stated on Sunday that it is blocking all cryptocurrency transactions. After the closure, there was a massive sell-off, and all the cryptocurrencies fell.
Extreme market conditions were the cause of the Celsius Network’s withdrawal suspension. Coin Base, on the other hand, said that it will let go of around 18% of its personnel. This company, which is the US’s largest cryptocurrency by volume, is simultaneously laying off employees. As a result, the market has lost a lot of trusts. We are aware that the value of bitcoin depends on how sought-after it is; the more coins are sold, the less each one is worth.
Regulatory obstacles
Cryptos have experienced a rocky year in 2022. The cryptocurrency market declined in January but recovered in February. As they work to regulate cryptocurrencies, governments throughout the world have been closely watching the global crypto market. It seemed inevitable that the impending recession, together with rising interest rates, inflation, and unemployment, would have an impact on the crypto market. Not just the wealthy investors, but also people like you and me, are hanging tight to their funds. People are hesitant to invest their money in the current economic environment. People are even more cautious if it is something as volatile as bitcoin. There were more structural problems as well. The largest cryptocurrency exchange in the world, Finance, halted trading for a short period earlier this month, citing a problem with the transactions.
Oversold Area for Bitcoin
“Bitcoin saw yet another major correction, falling to around $25,000, the lowest level in more than 5 months. Interestingly, the Dollar Index (DXY) is also at a six-month high and gained 2 percent just yesterday, which caused the stock and cryptocurrency markets to fall. The long-formed triangle pattern has been broken below by the BTC trend on the daily time frame. At $24,000, immediate and crucial help is anticipated. As Bitcoin hit the oversold region, the RSI fell below 30, according to experts at WazirX Trade Desk.
While Bitcoin’s dominance rose above 48% for the first time in almost a year, Ethereum had a week-long correction of over 20% while seeing a more than 11% decline in value relative to Bitcoin.
Will Cryptocurrencies rise again?
Cryptocurrencies have naturally seen a great deal of volatility. Then, they pick up again. In June, the value of cryptocurrencies hit a new low of 2022. The value of all crypto assets fell to $977 billion, below the $1 trillion level.
A lot of assets are sold once the market collapses. The cryptocurrency market is also affected by this. In the past, these purchases were a prize for many Crypto Enthusiasts. They contend that cryptocurrency assets, like gold, provide insurance against price inflation. Investors hold the view that while an asset’s price tends to deviate from its fundamental worth in the short term, it tends to drift towards its intrinsic or true value over time.
On the other hand, skeptics think that these currencies are worthless in normal commerce. They worry that as a result, the investors won’t be able to hang on to any gains. They think that this crisis might spell the end for cryptocurrency.
Investors, who were now alarmed started selling even more bitcoins. Bitcoin lost more than 80% of its value in two crypto downturns during the past ten years, but finally, the coin recovered. The new cryptocurrency is by nature more volatile, thus investing advisors are currently urging extreme care. Bill Gates even referred to cryptocurrency as an expensive investment. In the end, despite what you think, cryptocurrency will still exist, even if some lose interest in it. Even though it’s just July, it already seems like a crypto winter.
