Skip to content
Pick any significant bitcoin that has remained relatively stable, like Bitcoin, Ethereum etc., and you will see that they all are currently trading in the red.
Anyone whose portfolio of investments has primarily been based on cryptocurrency must be panicking. New investors and long-term investors are also feeling the strain of this crash.
The global crypto-market has shrunk from $1.02 trillion to $983.72 billion, an 11 per cent decrease since Monday. The international cryptocurrency market cap has fallen by over $2 trillion after touching the $3 trillion mark in November last year. The price of almost every top coin is now worth half or even less than their all-time highs.
As of writing this article, Bitcoin was trading at $21,042. The day before, i.e. June 15, it was at $20,407, the lowest it had been in the last 18 months.
Ethereum or Eth, which used to trade above $2,000 just a few months back, was at $1,040 on June 15. Bitcoin alone plummeting 67 per cent from its highest.
But what led to this crash? Wasn’t crypto supposed to be immune from recessions, wasn’t it supposed to protect investors when “the mainstream economy failed?”
Well, we look at why cryptocurrencies, especially the two major ones, Bitcoin and Eth, are crashing.
Crash of two stablecoins
Last month, two low-profile but significant stablecoins, Luna and Terra, collapsed severely. Before the crash, Terra had a market capitalisation of over $18 billion.
Stablecoins are believed to be stable because they are priced equal to the US Dollar or another fiat currency and exist primarily so that crypto investors can get in and out of the fiat quickly with no third party (in this case, a bank) to approve these transactions.
When Luna crashed 99.90 per cent, Terraform Labs (the company behind Terra) tried to sell their entire Bitcoin to peg the rate at $1, which they failed to do. As a result, it wiped over $40 billion out of the crypto market. If a cryptocurrency pegged to the dollar and was supposed to be stable could crash this bad, investors felt that anything could happen to any other crypto.
The falling equity market
As crypto novices would like to believe otherwise, the crypto market is linked with the equity market. If a downward trend is witnessed in the stock market, the same gets reflected in the crypto market almost immediately.
This is because investor behaviour, consumer behaviour and several important factors that affect the stock market also affect the crypto market. With the equity market reeling for some time and tech stocks plunging over a quarter, it was only a matter before cryptos crashed.
Major economies hike interest rates.
Thanks to the reasons above, people were growing increasingly sceptical of cryptocurrencies this month.
Because of inflation and a looming recession, most major economies have had to adjust their interest rates. A vast majority of the people from all over the world don’t have the money to invest in a volatile asset like crypto.
And because most crypto exchanges mirror what is happening in the American stock market, when US stock markets crashed because of an interest rate hike by the US Federal Reserve, cryptocurrencies followed suit.
Shenanigans of crypto exchanges
All of these situations are making people lose confidence in cryptos. To make matters worse, Binance, the largest global crypto exchange and Celsius, one of the world’s largest crypto lenders, paused all Bitcoin withdrawals for a few hours.
While Binance claimed this was done because of a stuck transaction, Celsius claims that they had to pause lending because of extreme market conditions.
On top of that, Coinbase, one of the world’s largest crypto exchanges, laid off 18 per cent or 1,100 of its employees.
This meant investors panicked and started dumping Bitcoin and Eth, driving down their value.
Market corrections
Finally, there is the concept called market corrections. Market corrections tend to operate in waves. Because of the global lockdown, cryptocurrencies saw many people investing in them for the first time. Naturally, the value of coins like Bitcoin and Eth soared and overinflated.
However, the market corrects itself each time the value goes up because of oversubscription in cryptos.
In this process, there is a trough or a period where the market falls. Under normal circumstances, the plunge isn’t this bad. However, because of the reasons above, Bitcoin and Eth plunged a little more this time than usual. In a couple of weeks or months, things should return to normal – this is what investment experts believe.
What next?
People with liquidity and looking for investment opportunities will invest, no matter how bad the market is.
The hope is always to buy low and sell high, and the crypto market has been at its lowest in the last 18-24 months.
Because crypto is significantly cheaper now than it used to be, people who still have Bitcoin would need to hold on to it, and others would need to start repurchasing it, thus driving the value back up.
