The crypto market has been in decline lately, but it’s not the first time this has happened. Keep reading to know more about what this could mean to investors.
The cryptocurrency market is known for its unusually high levels of volatility. This industry is highly volatile because there are no traditional fundamental factors or intrinsic values for decentralized assets. Most people agree that cryptocurrencies will not be a temporary phenomenon and are here for the long term.
In the short time that the industry has existed, several crypto crashes have shaken the decentralized financial system. The latest crypto crash is one of its worst. The current downturn is the worst in terms of the dollar value that has been wiped from the market.
Last November, the crypto market reached a peak of $3 trillion. However, it abruptly reverted to its original course when economic uncertainty caused many investors to sell risky assets. The initial losses caused by the crypto market’s volatility led to a flurry of liquidation of highly leveraged positions (investments that were funded with debt), which resulted in even more losses.
Retail traders were not the only ones who made risky bets. The interest rates charged by crypto lender Celsius were often double-digits on Ethereum deposits. These assets were then loaned to other entities to make a return. Celsius stopped withdrawing funds in mid-June as the crypto market plummeted, thereby increasing fear and instability.
The collapse of Terra Blockchain in has left the crypto industry still reeling from its effects. This event, which erased $60billion and rendered a once-famous ecosystem worthless, also leaves the crypto market feeling the aftershocks. Three Arrows Capital, a crypto hedge that had heavily invested in Luna, was recently forced to liquidate its assets due to owing a loan. Due to liquidity issues caused by Three Arrows’ default, crypto brokerage Voyager Digital recently stopped trading and withdrawals.
This domino effect is still going, but the crypto market already fell 71% from its peak, sending $2 trillion in flames. Is the crypto market going to crash for much longer?
Is the crypto market in collapse?
It is not a new fact that the bitcoin market is experiencing a crash. The cryptocurrency market has seen a gradual decline since the beginning of 2022. This weekend, Bitcoin reached its lowest point since December 2020, as the value of cryptocurrency fell once more.
As you can see, the cryptocurrency market collapse has already begun. We will explore what the cryptocurrency market crash means and when it should occur in 2022.
Why is crypto falling?
The de-pegging of UST from its $1 price was a likely cause of the first crypto crash, but this second crash is largely macroeconomic. According to the Consumer Price Index (CPI), inflation was 8.6% in May. This is a result of a report last week showing that producer prices rose 9.8% in April compared to the previous year. There are concerns that the Fed may have to raise interest rates earlier than anticipated to control inflation. This could cause a sharp decline in stocks and other potentially risky assets. The Fed has stated that it will keep rates close to zero until 2023. However, if inflation continues its rise, it might have to change its policy sooner.
The emergence of central lending schemes and “decentralized finance” (or DeFi) has helped crypto investors build huge leverage. This umbrella term refers to financial products that are built on blockchain technology.
However, the nature of leverage in this cycle has changed from the previous. According to Martin Green (CEO of Quant trading firm Cambrian Asset Management), leverage was primarily provided to retail investors through derivatives on cryptocurrency exchanges in 2017.
Retail investors who had opened positions in crypto when markets fell in 2018 were forced to liquidate their positions on exchanges because they couldn’t pay margin calls. This exacerbated the selling.
Will crypto rise again in 2022?
It is not yet clear when market turmoil will end. Analysts expect that there will be more pain as crypto companies struggle to repay their debts and process client withdrawals.
Experts are predicting that this crash won’t last for long but it is difficult to know what to do when it comes to cryptocurrency. Every few weeks, another company loses value. It is easy to understand why it is called a volatile investment.
The most intriguing thing about cryptocurrency is the use of blockchain technology. This basically means that crypto cash can be protected in a decentralized banking environment. A system that allows people to trade or sell an NFT token (non-fungible token), means people can spend, trade, and use their money without interference from the government or banks.
As the distrust of government grows, there are many benefits to having a decentralized bank system that allows people to operate independently. The ideology behind cryptocurrency is very similar to libertarianism, which believes that individuals should be able to rule themselves without the interference of a government. We can see the reasons for the rapid rise and subsequent crash of cryptocurrency by framing it as a social movement.
It is difficult to predict whether cryptocurrency will rebound after all the recent falls. People might be more inclined to invest in safer investments, with a possible recession in the future.
Experts believe that these crashes are temporary. However, it is a good idea to not invest all of your money in cryptocurrency yet. Pimentel advises that you ask the same questions to companies if you are interested in investing. Remember that volatility is normal in this system, which is why it is still very early.
Crypto miners who rely on special computing equipment to settle transactions on blockchain could be in serious trouble. Miners play an important role in the blockchain world, but they also have to pay for the electricity that is needed to keep them running round the clock.
What are the potential risks associated with buying crypto?
Although the crypto market has experienced some recent highs, it is important to remember that it is still volatile. Do your research on crypto and be aware of the risks before you invest any money.
It is generally a good idea to invest in a declining market, as it increases your chances of making a profit when the market turns around. While you’re doing this, you must not divert your attention from the market analysis. Before you make any investments in this downturn, it is important to conduct the necessary research.
