5 reasons why Bitcoin and other huge cryptocurrencies are crashing so hard – Technology News, Firstpost
FP explainersJune 16, 2022 17:39:25 IST
Pick a major bitcoin that has remained relatively stable such as Bitcoin, Ethereum etc. and you will see that they are all currently trading in the red.
Anyone whose investment portfolio is largely based on cryptocurrency should panic now. Not only new investors, but also long-term investors are feeling the pressure of this crash.
The global crypto market has shrunk from $1.02 trillion to $983.72 billion, down 11 percent since Monday. The global cryptocurrency market cap has fallen by more than $2 trillion after hitting $3 trillion last November. The price of almost every top coin is now worth half or even less than their all-time high.
At the time of writing this article, Bitcoin was trading at $21,042. The day before, that is, June 15, it was $20,407, its lowest level in the past 18 months.
Ethereum or Eth, which traded above $2,000 just a few months ago, stood at $1,040 on June 15. Bitcoin alone fell 67 percent from its all-time high.
But what led to this crash? Shouldn’t crypto be immune to recessions, shouldn’t it protect investors when “the mainstream economy failed?”
Well, we take a look at why cryptocurrencies, especially the two most important ones, Bitcoin and Eth, are crashing.
Crash of two stablecoins
Last month, two inconspicuous but very important stablecoins, Luna and Terra, collapsed heavily. Before the crash, Terra had a market cap of over $18 billion.
Stablecoins are believed to be stable because they are priced similarly to the US dollar or any other fiat currency and exist primarily so that crypto investors can easily get in and out of fiat without the need for a third party (in this case, a bank) these must approve transactions.
When Luna crashed 99.90 percent, Terraform Labs (the company behind Terra) tried to sell their entire Bitcoin to lock the price at $1, which they failed to do. As a result, it wiped out more than $40 billion from the crypto market. If a cryptocurrency pegged to the dollar and supposed to be stable could crash that bad, investors felt like anything could happen to any other crypto.
The falling stock market
As much as crypto novices would like to believe otherwise, the crypto market is connected to the stock market. If a downward trend is observed in the stock market, the same is reflected in the crypto market almost immediately.
This is because investor behavior, consumer behavior and a number of important factors that influence the stock market also affect the crypto market. With the stock market faltering for some time and technology stocks plummeting by more than a quarter, it was only a matter of time before cryptos crashed.
Major economies raise interest rates
Thanks to the two reasons mentioned above, people became more and more skeptical about cryptocurrencies this month anyway.
Due to inflation and an impending recession, most major economies have had to adjust their interest rates, and a vast majority of people around the world don’t actually have the money to invest in a volatile asset like crypto.
And because most crypto exchanges mirror what’s happening in the US stock market, when the US stock markets crashed due to a rate hike by the US Federal Reserve, cryptocurrencies followed suit.
Shenanigans from crypto exchanges
All these situations make people lose faith in cryptos. To make matters worse, Binance, the largest global crypto exchange, and Celsius, one of the world’s largest cryptocurrency lenders, have paused all Bitcoin withdrawals for a few hours.
While Binance claimed this was done due to a stalled transaction, Celsius claims they had to pause lending due to extreme market conditions.
In addition, Coinbase, one of the world’s largest crypto exchanges, has laid off 18 percent or 1,100 of its employees.
All of this meant investors panicked and started dumping Bitcoin and Eth, causing their value to plummet.
Finally, there is the concept called market corrections. Market corrections usually work in waves. Due to the global lockdown, many people saw investing in cryptocurrencies for the first time. Of course, the value of coins like Bitcoin and Eth has soared and exaggerated.
Every time the value rises due to oversubscription in cryptos, the market corrects itself.
In this process, there is a trough or period when the market falls. Under normal circumstances the dive is not that bad. However, due to the reasons mentioned above, Bitcoin and Eth collapsed a little more than usual this time. In a few weeks or months everything should be 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 crypto market is at its lowest in the last 18-24 months.
Since crypto is now significantly cheaper than it used to be, people who still have Bitcoin should hold onto it and others should start buying it again, pushing its value back up.