FP ExplainersJun 16, 2022 17:39:25 IST
Pick any major bitcoin that has remained relatively stable, like Bitcoin, Ethereum etc and you will see that they all are currently trading in the red.
Anyone whose portfolio of investments has largely been based on cryptocurrency must be panicking right now. Not just new investors, but long-term investors as well are feeling the strain of this crash.
The global crypto-market has shrunk from $1.02 trillion to $983.72 billion, an 11 per cent decrease since Monday. The global cryptocurrency market cap has fallen by over $2 trillion after touching the $3 trillion mark in November last year. The price of almost every top coin is now worth half or even less than their all-time highs.
As of writing this article, Bitcoin was trading at $21,042. The day before, i.e June 15, it was at $20,407, the lowest it has been in the last 18 months.
Ethereum or Eth which used to trade above $2,000 just a few months back, was at $1,040 on June 15. Bitcoin alone, plummeting 67 per cent from its highest.
But what led to this crash? Wasn’t crypto supposed to be immune from recessions, wasn’t it supposed to protect investors when “the mainstream economy failed?”
Well, we take a look at why cryptocurrencies, especially the two major ones, Bitcoin and Eth are crashing.
Crash of two stablecoins
Last month, two low-profile but very significant stablecoins, Luna and Terra, collapsed badly. Before the crash, Terra had a market capitalisation of over $18 billion.
Stablecoins are believed to be stable because they are priced equal to the US Dollar or another fiat currency and exist primarily so that crypto investors can get in and out of the fiat easily with no third party (in this case, a bank) to approve these transactions.
When Luna crashed 99.90 per cent, Terraform Labs (the company behind Terra) tried to sell their entire Bitcoin, to peg the rate at $1, which they failed to do. As a result, it wiped over $40 billion out of the crypto market. If a cryptocurrency that was pegged to the dollar and was supposed to be stable could crash this bad, investors felt that anything could happen to any other crypto.
The falling equity market
As much as crypto novices would like to believe otherwise, the crypto market is linked with the equity market. If a downward trend is witnessed in the stock market, the same gets reflected in the cryptomarket as, almost immediately.
This is because investor behaviour, consumer behaviour and a number of important factors that affect the stock market also affect the crypto market. With the equity market teetering for some time, and with tech stocks plunging over a quarter, it was only a matter of time before cryptos crashed.
Major economies hike interest rates
Thanks to the two aforementioned reasons people anyway were growing increasingly sceptical of cryptocurrencies this month.
Because of inflation and a looming recession, most major economies having had to adjust their interest rates, a vast majority of the people from all over the world actually don’t have the money to invest in a volatile asset like crypto.
And because most crypto exchanges mirror what is happening in the American stock market, when US stock markets crashed because of an interest rate hike by the US Federal Reserve, cryptocurrencies followed suit.
Shenanigans of crypto exchanges
All of these situations are making people lose confidence in cryptos. To make matters worse, Binance, the largest global crypto exchange and Celsius, one of the world’s largest crypto lenders, paused all Bitcoin withdrawals for a few hours.
While Binance claimed that this was done because of a stuck transaction, Celsius claims that they had to pause lending because of extreme market conditions.
On top of that, Coinbase one of the world’s largest crypto exchanges laid off 18 per cent or 1,100 of its employees.
All of this meant investors panicked and started dumping Bitcoin and Eth, driving down their value.
Finally, there is the concept called market corrections. Market corrections tend to operate in waves. Because of the global lockdown, cryptocurrencies saw a lot of people investing in them for the first time. Naturally, the value of coins like Bitcoin and Eth soared and overinflated.
However, each time the value goes up because of oversubscription in cryptos, the market corrects itself.
In this process, there is a trough or a period where the market falls. Under normal circumstances, the plunge isn’t this bad. However, because of the aforementioned reasons, this time Bitcoin and Eth plunged a little more than normal. In a couple of weeks or months, things should go back to normal – this is what investment experts believe.
People who have liquidity and are looking for investment opportunities will invest, no matter how bad the market is.
The hope is to always buy low and sell high, and right now, the cryptomarket is at its lowest in the last 18-24 months.
Because crypto is significantly cheaper right now than it used to be, people who still have Bitcoin would need to hold on to it and others would need to start buying it again, thus driving the value back up.