The cryptocurrency market is plunging to a new low every day. Bitcoin, the world’s largest cryptocurrency is at its 18-month low, plunging to $20,407 (June 15). It is down by around 60 per cent so far this year. Meanwhile, the second-largest crypto Ethereum fell over 25 per cent to $1,040.
The global crypto-market has shrunk from $1.02 trillion to $983.72 billion, an 11 per cent decrease since Monday, according to CoinMarket cap. All major cryptocurrencies have been trading in the red lately, with the fall testing even long-term investors. Here we explain all the reasons that triggered the great crypto-market crash.
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Luna-Terra crash
It all started after the Luna-Terra fiasco. It was an event that had severe consequences for not only its investors but the crypto ecosystem at large. Many investors lost their entire life savings parked in Terra coin, a stablecoin with a market capitalisation of over $18 billion before the crash.
Stablecoins are supposed to be priced equal to the US Dollar or another fiat entity 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. There are multiple stablecoins in the market, such as Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) to name a few. Three of the mentioned stablecoins are pegged to USD issued by the central bank. These entities own a treasury of dollars as cash reserves or commercial papers/receivables that back each coin to $1.
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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 crypto market is linked with the equity market as well. If a downtrend is witnessed in the stock market, the same is being replicated in the crypto-sphere as well. Many of the factors that affect the stock market also affect crypto prices.
In late 2021 and into mid-2022, cryptocurrency prices rose and fell similarly to equity prices, as per data received from Investopedia. The same can be seen now as well as tech stocks such as Amazon, Tesla, Apple dipped more than 6 per cent, if you look at S&P 500 chart. This is a big deal in the equity market. Similar pattern was seen in the crypto market as well. Bitcoin, Musk backed Dogecoin, and Ethereum on Monday fell below $23,000.
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A report by New York Times revealed that Bitcoin’s price movements is closely mirrored that of Nasdaq, a benchmark that’s weighted towards tech stocks. While crypto markets should ideally perform independent of the traditional markets, they have been sensitive to movements in the mainstream financial world.
Interest rate hike
In a bid to cool down inflation, the US Federal Reserve has decided to increase the rate of interest. A report by the Wall Street Journal has signaled that the Fed would follow aggressive strategy to increase the price of debt, slow spending and rein in record high inflation. The aggressive rising of interest rates is commonly viewed as a leading recession indicator.
Following the news, the stock market as well the crypto market witnessed a huge downfall, investors lost trust and started selling off their their digital assets, causing a bloodbath in the crypto market.
Celsius Network
Celsius Network, a Decentralised Finance announced on Sunday that it is freezing all the crypto transactions citing “extreme market conditions.” Following the shutdown, an enormous sell-off was witnessed, where all the cryptos plunged.
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“We are taking this necessary action … to stabilize liquidity and operations while we take steps to preserve and protect assets,” the company had said in a blog post. “Furthermore, customers will continue to accrue rewards during the pause in line with our commitment to our customers.”
According to a report by Reuters, as of May 17, the company had processed $8.2 billion worth of loans and had $11.8 billion in assets, according to its website. It said in August last year that it had more than $20 billion in assets.
Regulatory challenges
2022 has been a rollercoaster ride for cryptos. In January, the crypto market fell but again rose in February. The global crypto market has been under the scrutiny of the world governments as they try to regulate cryptos.
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India is yet to be table the crypto bill. The Bill seeks to prohibit all private cryptocurrencies in India. The country has also levied a 30 per cent tax on crypto investors and a 1 per cent TDS on every crypto intra-traders. Currently, India has not regulated cryptos but won’t legalise it as well.
In January 2022, Russia’s central bank proposed banning the use and mining of cryptocurrencies on Russian territory, citing threats to financial stability, citizens’ well-being and its monetary policy sovereignty. Regulatory challenges have made it difficult for investors to choose whether investing in crypto is the right thing to do.
