What is Behind the Crash in the Cryptocurrency Market?

Stock market investors have been having a rough time over the past fortnight. Many of the biggest tech stocks have seen billions of dollars wiped off their market cap, resulting in a huge loss for tens of thousands of investors. That being said, those guys don’t know pain… try being a cryptocurrency trader right now. The situation which is unfolding with each passing day is nothing short of alarming, disturbing, and for those with large holders – terrifying.

Bitcoin has lost 25% of its value in just one month, and every other cryptocurrency on the market is tied to Bitcoin in some way or another. Ethereum is down 33% over the same period, and even memecoin favourite Dogecoin has suffered a similar fate – almost 50% of its value has been lost. There isn’t a single cryptocurrency which has escaped the trend, leading many to ask – are we witnessing the end of the cryptocurrency revolution?

Crypto’s Recent History

Things were looking up for the crypto market over the past twelve months – there has been a huge explosion in adaption, with thousands of online retailers beginning to accept some cryptocurrencies as payment, as well as a continuation of the widespread adoption of Crypto in the online gambling world. Bitcoin and cryptocurrency based online casinos used to be restricted to offering only low-tier games, but this has been changing quickly – even major online casinos that offer games such as PG Slot have begun accepting Bitcoin as payment.

So what has gone wrong?

The Reasons Behind the Crypto Crash

The cryptocurrency market is every bit as complex as the stock market, so there is no single reason that has caused this collapse. It should be said, however, that this is not the first time something like this has happened – Bitcoin has suffered far more serious depreciations during the decade it has been offering, and every time the currency has ended up coming back stronger, eventually reaching new all-time highs.

Unfortunately, there are some reasons to be sceptical as to whether that is going to happen again this time. Firstly, the worldwide runaway inflation that is hurting every developed economy. Central banks are hiking interest rates to levels not seen in decades, and geopolitical instability caused by the ongoing war in UK are all affecting people’s confidence in speculative assets such as Bitcoin.

Stock Market Correlation

The cryptocurrency market is strongly correlated with the stock market too, and the further that tumbles, the further we are likely to see cryptocurrency fall as well. People have long touted bitcoin as an inflation hedge on par with gold and silver, but this was always a ridiculous comparison – gold and silver are physical assets, whilst Bitcoin is only worth what the current market thinks it is worth. Gold prices go up in times of crisis, and as we are seeing, the same cannot be said of cryptocurrencies.

In many ways, Bitcoin and other cryptocurrencies are very much like a tech stock, the very type that has shouldered the brunt of the recent bear market on the stock exchanges. We’ve seen the Nasdaq drop up to 4% each day over the past week. The Dow has not suffered quite as badly, but daily drops of around 2% have been common. The S&P is the same with regular drops of up to 2.5%.

The Villain of The Story

One cryptocurrency, in particular, has suffered the most dramatic fall from grace we have ever witnessed in this market. A so-called algorithmic stable coin known as TerraUSD (UST), kept its parity with the US dollar by using a linked cryptocurrency known as LUNA, which would create and burn tokens on demand in order to maintain a steady level of supply and demand.

That system had been working well for a long time, but when the current crisis hit, things changed almost overnight. TerraUSD depegged, dropping to around 90c, which spooked investors. A major selloff of LUNA tokens followed, further reducing the value of the TerraUSD token. This is a major problem, as so-called “stable coins” are designed as a safe haven for crypto traders to hold their money whilst they wait for a good opportunity to “buy the dip”. If the value of a stablecoin cannot be trusted, it is worthless.

The result? LUNA, one of the biggest cryptocurrencies in the entire market dropped in value from over $80 per coin all the way down to less than ten cents in a matter of days. TerraUSD is barely worth 50c on the dollar. This has created a major loss of trust in the entire cryptocurrency market, and it is going to be extremely difficult to convince people that had invested in LUNA and have now lost millions to ever buy any cryptocurrency ever again.

The process described above is described as a “death spiral” in the Crypto world, and this isn’t the first time it has happened. Previous cases involved much smaller coins – sure, it is sad that some people lost a few thousand dollars, pounds, or euros, but we weren’t talking about a coin with a market cap of over 80 billion USD. No, this event is a true first, and it is one that could have long-lasting damage within the crypto community.

What’s Next?

Bitcoin, Ethereum, and the rest of the top-tier cryptocurrencies are still falling day after day, and it is impossible to predict when the market will begin to stabilize. There was a lot of talk about a so-called “heavy support line” at $30,000, a number that we are hovering right around at this very moment. If Bitcoin can manage to stabilize at $30,000 then we are probably past the worst of the situation. If not, things could be very dire indeed.

If you are a cryptocurrency investor, it may be time to re-evaluate whether “HODL’ing” really is the best way to handle situations such as this. If you believe in the technology, you could buy more here – it’s a great opportunity, provided the market recovers. But just remember, things could go either way right now – the next fortnight is going to be crucial for cryptocurrencies.

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