Recently, all of the major cryptocurrencies have been trading in the red, putting even long-term investors to the test. Here, we outline the causes of the most recent crash.
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). So far this year, it has decreased by almost 60%. Ethereum, the second-largest cryptocurrency, dropped more than 25% to $1,040 in the meantime.
According to CoinMarketCap, the global cryptocurrency market has decreased from $1.02 trillion to $983.72 billion, an 11% decline since Monday. Recently, all of the major 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.
Luna-Terra crash :
Following the Luna-Terra debacle, everything began. Not only its investors, but the entire crypto ecosystem, suffered greatly as a result of the tragedy. 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 easily enter and exit the fiat market without the need for a third party (in this case, a bank) to approve 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 mention 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 organisations own a fund of dollars that backs each coin to $1 in the form of cash reserves or commercial papers/receivables.
With Luna losing 99.9 per cent of its value, Terraform Labs (the company behind Terra) laid out a plan to sell their entire Bitcoin reserves to bring back the peg to $1, which they eventually failed to do. As a result, it wiped over $40 billion out of the crypto market.
The equity 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 information obtained from Investopedia, cryptocurrency values fluctuated in late 2021 and into mid-2022 in a manner akin to stock prices. If you look at the S&P 500 chart, the same can be seen right now as well as tech firms like Amazon, Tesla, and Apple fell more than 6%. In the equity market, this is significant. The cryptocurrency market also displayed a similar pattern. On Monday, the price of Ethereum, Dogecoin, and Bitcoin all plummeted under the $23,000 mark.
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. The performance of the cryptocurrency markets should ideally be independent of those of the traditional markets, yet they have historically been sensitive to changes in those markets.
Interest rate hike :
The US Federal Reserve has agreed to raise interest rates in an effort to curb inflation. 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. Commonly regarded as a leading recession predictor is the aggressive increase in interest rates.Following the announcement, both the stock market and the cryptocurrency market had a sharp decline. Investors lost faith and started selling off their digital assets, which caused a carnage in the cryptocurrency market.
Celsius Network :
In response to "extreme market conditions," Celsius Network, a Decentralized Finance, stated on Sunday that it is blocking all cryptocurrency transactions. All the cryptos fell during the massive sell-off that followed the shutdown.
The company had stated in a blog post that it was taking "this necessary move... to stabilise liquidity and operations while we take actions to preserve and protect assets." In keeping with our commitment to our consumers, customers will also continue to collect incentives throughout the break.Reuters reported that as of May 17, the company had processed loans totaling $8.2 billion, and according to its website, it had assets worth $11.8 billion. It stated that it had assets worth more than $20 billion in August of last year.
Regulatory challenges :
Cryptos have experienced a wild ride 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.India has not yet introduced a cryptocurrency bill. All private cryptocurrencies are to be outlawed in India according to the Bill. The nation has also imposed a 30% tax on cryptocurrency investors and a 1% TDS on all intra-crypto trades. India does not currently regulate cryptocurrencies and will not legalise them either.
Russian central bank suggested a ban on cryptocurrency use and mining in January 2022, citing risks to the country's financial stability, residents' welfare, and control over its monetary policy. Investors now find it challenging to determine whether investing in cryptocurrencies is the right move due to regulatory issues.
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