For the past 60 days, the cryptocurrency market has experienced one of its most bearish periods since its inception, knocking off almost $1 trillion within the timeframe. The top two coins, Bitcoin and Ethereum have seen their value drop by more than 35% and 43% respectively in 2022. At the moment, the total market capitalization is at $1.2 trillion, the lowest in 11 months. These crashes naturally come after reaching record highs due to pent-up demand and hype from institutional investors and celebrities. Elon Musk, a cryptocurrency advocate, consistently hyped up the prices of Bitcoin and Dogecoin last year before the market went red. However, with the market in a downward spiral, here are the top 6 reasons why we are seeing the current cryptocurrency market crash.
1. The Terra Tsunami
Last year, Terra Luna was an investor delight gaining over 17000% in value from a very low price of $0.65 in January 2021 to a record high price of $116 in April this year. If you invested a thousand dollars in Terra within the aforementioned timeframe, your investment will be worth a whopping $178,000! But that gain would have evaporated completely after a complex financial attack on the stablecoin, Terra (UST) (an attack which also resulted in the de-pegging of the coin from $1 down to less than 35¢ in a matter of days) led to the cryptocurrency’s capitulation a few weeks ago. UST investors lost almost $45 billion within days. This sell-off in one coin eventually triggered a broad sell-off in the global crypto market, and investors started pulling out their money from crypto assets and parking their money in safer ones, like gold and government bonds. This is one of the biggest reasons behind the current cryptocurrency market crash.
2. Federal Interest Rate Hikes
Over the years, the cryptocurrency market has been in a parallel sequence with conventional stock markets due to increasing interest from institutional investors, which has sort of led to similar reactions during a slump. A recent hike in the interest rate by half a percentage point by the US Federal Reserves, the biggest hike in two decades, has led to a stock market slump due to investors’ pullback. This also affected the crypto market which lost over 10%, almost $200 billion, a few days after the hike.
3. Fear of Recession
There are mounting fears that a recession is around the corner as a result of rising inflation caused by major events across the globe. China’s economy, the world’s second-largest, is stalling due to the COVID 19 restriction and Russia’s invasion of Ukraine is still having a catastrophic effect on essential commodities like gas and food prices. This fear has been exacerbated by the increase in interest rate by the Federal Reserves as explained earlier. Typically, this has created a liquidity squeeze which will naturally affect secondary assets like investment in cryptocurrencies, tech stocks (tech giants like Tesla, Meta, Amazon, Apple, Netflix, Zoom and others lost over a trillion dollars in market value after huge share dumps by investors some weeks back), etc as disposable funds will be directed to essential items.
4. Institutional Interest Waning Off
2021 was a big year for the cryptocurrency space, especially for Bitcoin. A lot of institutions like Electric car company, Tesla, business intelligence company, MicroStrategy and Central America country, El Salvador all jumped on the crypto buzz giving the market one of its most bullish periods. Even government regulators in the US accepted the first Bitcoin futures exchange-traded funds to trade, adding to the bullish trend. But this year, interest in crypto assets has subdued as there have been continuous institutional crypto fund outflows in the last 6 weeks according to Coinshares, a digital asset management platform. Moreover, they appear to have increasing confidence in traditional assets with recovery from the Covid-19 pandemic in full swing and an end to global restrictions.
5. Tough Government Regulations
While a few countries like El Salvador and The Central African Republic have adopted the use of Bitcoin as a legal tender, others are looking to wave off the threat of cryptocurrencies by regulating (more like banning) them. These increasing attempts by government regulators to counter the threat posed by digital currency might have also been one of the major reasons behind the current cryptocurrency market crash, which eventually contributed to the plunge in cryptocurrency prices. Regulators in countries like Nigeria and Kenya, where the adoption of crypto is high, have placed huge stumbling blocks in crypto transactions. China, last year, clamped down on all crypto mining and exchanges. India’s hostilities towards digital currency are well documented while the US is devising means to regulate the Stablecoin ecosystem. Other countries that have completely or partially banned the transaction of crypto include Egypt, Iran, Indonesia, Columbia, Bolivia, and a host of others.
6. Vulnerability of Cryptocurrency Exchanges
The fear of a crypto hack is the beginning of a crypto dump. No investor wants their hard-earned investment stolen by greedy cybercriminals. Unfortunately, past hacks of centralized crypto exchanges since 2012 would have created a sort of blocker for would-be investors looking to join the crypto frenzy. In the last year alone, hackers stole over $360 million worth of cryptocurrency from top exchanges. This year, hackers plunged into the vault of one of the most popular cryptocurrency exchanges in the world, Crypto.com, stealing a total of 4,836.26 ETH, 443.93 BTC, and approximately US$66,200 in other currencies.
So, here are the 6 major reasons behind the current cryptocurrency market crash, which has led to a decline in the value of most cryptocurrencies. Some analysts have predicted that it’s going to get worse before it gets better based on past crypto bear/bull runs. And like every of this run (4 in total since the inception of Bitcoin over a decade ago), an opportunity is created to buy during the dip in preparation for another boom which is likely going to take a long time to come.