The market value of most cryptocurrencies has plummeted in recent months, leaving investors faltering.
The sharp drop in the midst of a wider market crash poses risks to the future of cryptographic assets and raises doubts about their isolation from the rest of the economy.
The global market capitalization of cryptocurrencies has recently fallen below $ 1 trillion, up from $ 3 trillion in November last year.
That decline has come from all parts of the crypto world, from steady falls in the value of popular currencies to the total implosion of big projects.
After reaching a high of nearly $ 70,000 per coin late last year, Bitcoin, which remains the most traded currency on the market, is now trading at just over $ 20,000. Other major currencies such as Ethereum and Solana have experienced similar falls.
The collapse of the Earth network, with its two cryptocurrencies designed to hold one to one dollar per coin, also played an important role in eliminating value in space. Other projects, such as the play-to-earn game Axie Infinity, also failed.
Some cryptocurrencies have recovered in value over the past week, but are still far from their 2021 peaks.
The fall in cryptocurrencies for much of 2022 coincided with the plummeting stock prices, as rising interest rates, fears of inflation and the recession are affecting financial markets around the world. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq have fallen more than 20 percent from their most recent highs amid a bleak economic outlook, and investment experts fear there may be deeper losses.
While cryptocurrencies have been envisioned as an alternative to traditional financial assets such as stocks and bonds, the values of digital tokens have moved in the same direction as stock prices at an increasing rate.
Bruno Macchialli, CEO of Delchain, attributed the connection to the growing number of traditional financial institutions and investors that have entered the crypto market in recent years.
“We’ve seen major players: financial agents, American companies enter the crypto world. So I don’t think it’s illogical for us to start seeing behavior that might be the same as what’s happening in the traditional market,” he said.
Cryptocurrencies are likely to face deeper pressure due to rising interest rates as the Federal Reserve continues to raise borrowing costs and fight inflation. The values of stocks and other riskier financial assets tend to decline as borrowing costs increase, corporate profits decline, and consumers invest less money in markets and more in savings.
Although most cryptocurrencies are not tied to a company’s financial performance, they could still face threats as higher rates and rising fears of recession encourage fewer people to buy and play in the market.
As the market has grown, so has the impact that cryptographic fluctuations can have on average consumers.
And with companies now allowing investors to put coins in their retirement accounts, exposure is more likely to increase.
“The average person should take from [the fall in crypto value] “Oleg Elkhunovich, a partner in the law firm Susman Godfrey, who has been involved in several cases of commercial cryptography litigation.”
The lack of significant regulations for cryptographic platforms may amplify the risk of volatile price fluctuations.
The particularly sharp drop in the crypto market in June, for example, coincided with the world’s largest cryptocurrency exchange, Binance, and a leading lending company, Celsius Network, which blocked everyday users from withdrawing assets.
Congress has difficulty approving federal rules on cryptocurrency. The latest bipartisan bill from Senators Cynthia Lummis (R-Wyo.) And Kirsten Gillibrand (DN.Y.) faces a tough battle between critics for removing authority from the assets of securities regulators.
According to Elkhunovich, increased investment in cryptography may eventually lead to greater independent oversight of regulatory action by creating more litigation opportunities.
“The reality is, from the civil litigation side, you need damages,” he explained. “Clearly there is damage now.”
Proponents of cryptocurrency say that while the decline has been detrimental, it also offers an opportunity for the industry to correct some of its problems and come out stronger.
Macchialli said the bearish crypto market will also continue to eliminate cryptocurrencies and offers that are not built to last in times of economic turmoil. Those collapses, he said, are a natural part of the evolution of the industry.
“Those who remain are the ones who are having a real utility model based on something they are proposing and that investors are seeing something positive depending on the strategy or the will,” he said.