Every day, the cryptocurrency market hits a new low. Bitcoin, the world’s largest cryptocurrency, has dropped to an 18-month low of USD 20,407 (June 15). So far this year, it is down by about 60%. Meanwhile, the second-largest cryptocurrency, Ethereum, fell more than 25% to $1,040.
According to CoinMarketCap, the global crypto-market has decreased from $1.02 trillion to $983.72 billion, an 11% decrease since Monday. Recently, all major cryptocurrencies have been trading in the red, putting even long-term investors to the test. We explain all of the factors that contributed to the massive crypto-market crash in this article.
Luna-Terra crash
The Luna-Terra debacle was the starting point for all the events. This crash had a great impact on not only its investors but also on the crypto ecosystem. Many investors lost their complete life savings in Terra coin, a stablecoin with a market cap of more than $18 billion prior to the crash.
Stablecoins are supposed to be priced the same as the US Dollar or another fiat entity and exist primarily to allow crypto investors to easily enter and exit the fiat without third-party involvement (in this case, a bank) to approve these transactions.
Tether (USDT), USD Coin (USDC), and Binance USD (BUSD), to name a few, are examples of stablecoins. Three of the aforementioned stablecoins are pegged to central bank-issued USD. These organizations have a treasury of dollars in the form of cash reserves or commercial papers/receivables that back each coin to $1.
With Luna losing 99.9% of its value, Terraform Labs (the company behind Terra) devised a plan to sell their entire Bitcoin reserve in order to restore the peg to $1, which was unsuccessful. As a result, it wiped out more than $40 billion from the cryptocurrency market.
The equity market
The cryptocurrency market is also linked to the equity market. If there is a downtrend in the stock market, the same can be witnessed in the crypto-sphere too. Many of the same factors that influence the stock market also influence cryptocurrency prices.
According to Investopedia data, cryptocurrency prices rose and fell similarly to equity prices in late 2021 and early 2022. If you look at the S&P 500 chart, you can see that tech stocks like Amazon, Tesla, and Apple have dropped more than 6%. This is significant in the stock market. A similar pattern was observed in the cryptocurrency market. On Monday, Bitcoin, Musk’s Dogecoin, and Ethereum all fell below $23,000.
According to a New York Times report, Bitcoin’s price movements closely mirror those of the Nasdaq, a tech-heavy benchmark. While cryptocurrency markets should ideally perform independently of traditional markets, they have historically been sensitive to movements in the mainstream financial world.
Interest rate hike
The US Federal Reserve has decided to raise interest rates in order to reduce inflation. A report by the Wall Street Journal has warned of the Fed’s aggressive strategy to increase the price of debt, slow spending, and rein in record-high inflation. The aggressive rise in interest rates is widely regarded as a leading indicator of a recession.
Following the news, both the stock market and the crypto market experienced significant declines; investors lost trust and began selling off their digital assets, resulting in a bloodbath in the crypto market.
Celsius Network
Celsius Network, a Decentralized Finance platform, announced on Sunday that it has frozen all cryptocurrency transactions due to “extreme market conditions.” Following the shutdown, there was a massive sell-off in which all cryptos plummeted.
The company in a blog post stated that the required actions were taken to stabilize liquidity and operations while also taking measures to preserve and protect assets. Furthermore, in keeping with our commitment to our customers, they will continue to accumulate rewards during the pause.
According to Reuters, as of May 17, the company had processed $8.2 billion in loans and had assets totaling $11.8 billion, according to its website. It stated in August of last year that it had assets worth more than $20 billion.
Regulatory challenges
Cryptos have witnessed many ups and downs in 2022. The cryptocurrency market fell in January before rebounding in February. The world governments have been scrutinizing the global crypto market as they attempt to regulate cryptos.
The crypto bill has yet to be introduced in India. The Bill proposes to outlaw all private cryptocurrencies in India. The country has also imposed a 30% tax on crypto investors and a 1% TDS on all crypto intra-traders. Currently, India has not regulated cryptos but will not legalize them either.
Russia’s central bank proposed a ban on the use and mining of cryptocurrencies on Russian territory in January 2022, citing threats to financial stability, citizens’ well-being, and the country’s monetary policy sovereignty. Regulatory challenges have made it difficult for investors to determine whether investing in cryptocurrency is the best option.
