The cryptocurrency market is down 11.84% in the last 24 hours (1pm, 12 May 2022).
After gains and record highs in 2021, cryptocurrencies are enduring a turbulent time with unpredictable price changes.
Bitcoin took a brutal fall on Monday, briefly dipping below $30,000 for the first time since July 2021.
The world’s largest cryptocurrency is now worth less than half of what it was in the fall. Other cryptocurrencies, like Ether and BNB, have seen similar falls, while trading volumes have also tapered off on major exchanges. Some experts are now warning of a “crypto winter,” in which the sector’s astonishing growth is replaced by an extended period of contraction.
Here are some of the main factors leading to the current slump.
1. Bitcoin is connected to the rest of the financial market.
Crypto evangelists have long hoped that the independent nature of crypto would make it resistant to inflation and crises.
Bitcoin, the number one cryptocurrency, has no central issuer or authority controlling it. That independence from government, many argued, should ensure that Bitcoin would hold its value through economic dips, international wars, or drastic policy changes.
But the last couple of years have proven this is false. When the coronavirus pandemic crushed global markets in March 2020, so too fell Bitcoin, falling by 57%.
Stock markets and cryptocurrencies then both recovered and rose at a staggering rate, which analysts believe was caused by a combination of free time, disposable income, and pandemic-relief money pumped into the world by governments.
But lately, investors have been wary that change is in the air, as inflation led the Federal Reserve and other central banks to raise interest rates. For investors looking for a safe port, Bitcoin, which swings wildly by nature, may seem too risky.
Bitcoin’s fall comes on the heels of the Dow and Nasdaq’s worst single-day declines since 2020, as well as the S&P 500 hitting its nadir in the past year.
The market has been unsettled by Russia’s invasion of Ukraine, which has exacerbated inflation, supply chain issues, and oil prices. Slowed growth in China amidst COVID-19 outbreaks there are also contributing to financial anxieties.
Some crypto evangelists predict that Bitcoin’s price will decouple from the stock market down the road—but for now, the two are very much intertwined.
2. Crypto is inherently volatile.
Even the biggest crypto boosters will tell you that success in the crypto world is far from guaranteed. Its volatility is part of its very appeal to many speculators: that they could make money at rates far faster than that of regular stock brokers.
But with the promise of the boom also comes that of the bust. Since Bitcoin’s inception in 2009, there have been several major bear- and bull- cycles, with short-term investors alternately flooding the market and then losing interest.
Many exchanges, especially during high times, offer inherently risky propositions. They are allowing traders to invest with borrowed crypto if prices start to drop, whether due to big investors selling off their shares or other reasons, a lack of actual cash flow can contribute to even faster free-falls.
The volume of people investing in crypto at any given time is highly variable as well: More than half of traders who held crypto at the end of 2021 had only entered the market that year, according to crypto firm Grayscale Investments.
And it’s no accident that crypto crashes tend to occur over weekends. That’s when investors tend to tune out, so the ones who are making trades can make bigger waves.
3. Worries about regulation and security breaches
Given that crypto derives some of its value from people’s belief in it, markets can be rattled by surrounding skepticism or policy changes. China’s crackdown on bitcoin mining in mid-2021, for example, led to Bitcoin crashing from $65,000 in April to $35,000 in June.
The total market capitalization of crypto similarly fell around that time when Elon Musk announced Tesla would no longer accept bitcoin for payments in May 2021, citing environmental reasons.
Many crypto investors have watched anxiously as governments of countries central to crypto trading or mining—including the U.S., China, India, and Germany—have moved toward regulation.
Meanwhile, crypto has been shaken by a wave of hacks and security breaches, including a $600 million hack of the Ethereum sidechain Ronin. These hacks have shaken consumer confidence in crypto and slowed growth from new potential buyers entering the field.
The number of real-world use cases that would bring newcomers into the crypto space seems to be slowing this year, Edward Moya, senior market analyst at Oanda, told CBS News. “There’s a belief that mainstream adoption [of Bitcoin] is taking a lot longer than people expected,” Moya said. “Right now, we’re seeing that the crypto market is in a wait-and-see mode.”
4. UST
Some experts also believe that the recent struggles of UST, TerraUSD, one of the largest stablecoins, played a role in the most recent Bitcoin crash. TerraUSD, also known as UST, is a token that is designed to always be worth $1, but sank below 70 cents on Monday as holders panicked and sold off their tokens en masse in a pseudo-bank-run.
In order to defend UST’s price, the Luna Foundation Guard, which safeguards the stablecoin, drained its $1.3 billion bitcoin reserve and bought $850 million more in Bitcoin. “That [action could] add meaningful sell pressure on bitcoin and could drag down markets with it,” Corey Miller, growth lead at dYdX, told TechCrunch.
Caleb Franzen, a senior market analyst at Cubic Analytics, explained in the same article that “historically negative performance” and “historically negative sentiment” can lead to “continued selloff,” which impacts prices negatively.
5. Elon Musk Effect
It follows recent crashes brought on by Tesla making a u-turn on accepting Bitcoin as payment for its products.
Musk’s shock announcement when he appeared to be in favour of Tesla accepting Bitcoin as payment for its services.
The electric car company bought $1.5b (£1.06b) of Bitcoin shares, which in turn sent the market price of both the crypto and Tesla soaring, but those days are a distant memory to traders.
The impact on the environment of Bitcoin mining – a complicated process of minting new digital tokens – saw Tesla withdraw this option for customers.
The billionaire entrepreneur said: “We are concerned about rapidly increasing use of fossil fuel for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.”
Musk reaffirmed his belief that cryptocurrency has a “promising future” but that it “cannot come at great cost to the environment”, in his Twitter post.
Musk has been a long-time advocate of cryptocurrencies and the Tesla decision was felt across the market, with other digital tokens going down in price.
Musk’s influence cannot be underestimated as, even though the likes of PayPal, Mastercard and Facebook have backed cryptos, the Tesla announcement still rocked the market.
6. China’s Ban
A further blow was dealt when China ordered Bitcoin mining in its Sichuan province to shut down completely and furthermore told banks to stop supporting crypto transactions, in the latest wave of restrictions on cryptos.
Now the country’s central bank, the People’s Bank of China, has effectively banned digital coins after announcing all transactions of cryptocurrencies are illegal.
Big picture
Whether the crypto slide continues remains to be seen. Some believe that things will only get worse as more and more investors panic. But after the price of Bitcoin dropped below $30,000, its price corrected when evangelists “bought the dip,” or entered the market at a discounted rate. They believe that amidst its day-to-day turbulence, Bitcoin will continue its zoomed-out growth pattern that it has displayed over the last decade.
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