BItcoin fell sharply on Monday. The cryptocurrency briefly touched $30,000 below its July 2021 low. The world’s largest cryptocurrency is now worth less than half of what it was in the fall. Similar falls have been seen in other cryptocurrencies like Ether, BNB and BNB. Trading volumes on the major exchanges have also dropped. Some experts are now warning of a “crypto winter,” in which the sector’s astonishing growth is replaced by an extended period of contraction.
Short-term and longer-term factors are responsible for the current decline in Bitcoin and other cryptocurrency. These include larger financial markets, and the crash of major stablecoins. These are the key factors that have led to this slump.
Bitcoin connects to all of the other parts of the financial marketplace.
Since long, crypto evangelists have hoped that cryptocurrency’s independent nature would render it immune to inflation and other crises. Bitcoin, which is currently the top cryptocurrency, doesn’t have a central issuer nor authority that controls it. Many argued that Bitcoin’s independence should allow it to be held steady despite economic downturns, wars abroad, or policy shifts.
However, the past few years have shown that this has been false. Bitcoin plummeted 57% in the wake of March 2020’s coronavirus pandemic that decimated global markets. Both stock markets and cryptocurrency recovered quickly and rose at an astonishing rate. Analysts believe this was due to a mixture of disposable income and money that governments had pumped into the global pandemic relief fund.
However, recent investors are wary about the possibility of changes, since inflation has led to central banks and the Federal Reserve raising interest rates. Bitcoin can seem risky for those looking for an easy port. It swings wild by nature and may be 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. The financial anxiety also stems from slow growth in China, which is accompanied by COVID-19-related outbreaks. 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.
Cryptocurrency has an inherent volatility.
Even crypto-bombers with the most powerful connections will admit that there is no guarantee of success. Many speculators love its volatility because they can make more money with it than normal stockbrokers.
The boom promises, however, also come the risk of 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. High-risk investments are common on many exchanges. This allows traders to borrow crypto. A lack of cash flow, or large investors selling their shares, can cause prices to fall faster than expected.
It is not easy to predict the volume of crypto investors at any one time. More than half of crypto traders at the close of 2021 only had just entered the crypto market in that year according 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.
Beware of security and regulation 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. At the time Elon Musk made an announcement that Tesla would stop accepting bitcoin as payment in May 2021, due to environmental issues.
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. A wave of security breaches and hacks has shaken crypto, as well as a $600m hack of Ethereum’s sidechain Ronin. These hacks have shaken crypto’s consumer confidence and reduced the number of potential buyers.
Edward Moya from Oanda said that the amount of actual-world uses cases which would attract newcomers to crypto is slowing down this year. “There’s a belief that mainstream adoption [of Bitcoin] is taking a lot longer than people expected,” Moya said. “Right now, what we’re seeing is that the crypto market is in a wait-and-see mode.”
UST
Experts also think that TerraUSD, the biggest stablecoin, was responsible for the latest Bitcoin crash. TerraUSD also known by UST is a token designed to never be worth $1. But on Monday, its value fell below 70c as holders panicked, and they sold off large quantities of their tokens 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.
Big picture
We will see if crypto continues to slide. Many believe things will get worse as investors panic more. 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. The evangelists believe that Bitcoin, despite its daily turbulence and volatility, will maintain its rapid growth rate of 1% per year over the past decade.
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