Why have crypto markets collapsed?

Cryptocurrency prices have fallen for a variety of reasons, from rising interest rates to rising inflation and market contagion due to the collapse of the stable UST currency last month.

The latest downward trend in cryptocurrencies has seen the market crater in recent months, with individual digital tokens falling to their lowest marks in two years and the industry as a whole falling by nearly $ 2 trillion since the end of last year.

The price of Bitcoin (BTC), the most popular cryptocurrency, fell below $ 18,000 on Saturday before bouncing above $ 20,000. The last time Bitcoin was at that level was in November 2020, before reaching an all-time high of nearly $ 69,000 last November.

Bitcoin has lost more than 70 percent of its value since then. Other important tokens such as Ethereum and altcoins have suffered a similar fate.

With investments selling in a panic as turbulence in the crypto market ensues, companies are being forced to cut payrolls.

So what is driving the recent decline in cryptocurrency values?

From bull to bear

The foundations for a bullfight in the cryptocurrency market were laid in March 2020, when the World Health Organization (WHO) declared Covid-19 a pandemic that paralyzed social and economic life due to blockade restrictions imposed by nation states. everyone.

Since then, “many states have given incentives to support the economy [and] International companies have made big purchases of BTC, “said Helin Celik, an Istanbul-based cryptocurrency market and blockchain analyst. TRT world.

Underlining more than 225,000 Bitcoin currently held by 27 public companies, including Tesla and MicroStrategy Inc., Celik said corporate purchases increased during the pandemic.

“Although these purchases led to the upward movement in the market, individual purchases followed the companies,” Celik said.

Under these circumstances, the value of the major cryptocurrency began to rebound and peaked at $ 69,000. As the liquidity of the cryptocurrency market increased, it reached a volume of $ 3 trillion by the end of 2021.

After vaccines helped fight the pandemic and deadlines for the global economy ended in 2021, consumption-based inflation began to appear. “Especially in the United States, unemployment has risen, growth forecasts have been reduced, and inflation has begun to create a deadlock on a global scale,” Celik said.

To stop inflation, countries have begun to raise interest rates. Last week, the US Federal Reserve. UU. it raised its benchmark interest rate by 75 basis points, marking its biggest rate hike in 28 years.

Although a ton of money flowed into cryptocurrencies throughout the pandemic, rising interest rates have forced investors to move their money away from high-risk assets such as cryptocurrencies.

The conflict between Russia and Ukraine has also caused chaos in the market, as supply chain disruptions and rising energy prices have further exacerbated inflation.

The collapse of Earth

One of the triggers for the contagion in the cryptocurrency market has been stablecoins, or cryptocurrencies that are supposed to protect buyers from the volatility of digital currencies by linking their value to a reserve asset such as the US dollar.

In May, the Earth ecosystem crashed when hundreds of billions of dollars were removed from the market. The stable currency of TerraUSD (UST) and its token brother Luna fell to almost zero from a combined value of more than $ 40 billion just before its fall, which led to massive sales.

“The devaluation of the Earth’s stable currency and the foundation’s main LUNA currency is the first internal dynamic that causes panic selling,” Celik said.

“Systematic problems in the crypto market have damaged investor confidence and accelerated its exit from the market. At this point, too many long positions have been liquidated, except for funds shifted to different financial instruments,” he added.

“As the market fell, miners began selling coins to the cryptocurrency markets with rising energy costs and declining profits.”

While long-term Bitcoin investors and miners were selling, BTC reserves began to rise, Celik said.

“With the deteriorating demand-supply balance of Bitcoin, the price has continued to fall.”

Celsius freezing

A few weeks after the collapse of TerraUSD, another domino arrived that shook the market.

Last week, the major US cryptocurrency company Celsius Network froze withdrawals and transfers citing “extreme” market conditions.

Celsius says on its website that customers who transfer their encryption to their platform can get an annual return of up to 18.6 percent. The website urges customers to “Earn high. Borrow low”.

In a blog post, the company said it froze withdrawals, as well as transfers between accounts, “to stabilize liquidity and operations while we take steps to preserve and protect assets.”

After Celcius froze user accounts, “a lot of BTC and ETH exits from wallets were observed,” Celik said.

“The Celsius institution, which could not make payments to its customers, also invested in TerraUSD’s Anchor and lost about $ 55 million of it,” he added.

Although rescue plans are underway for Celsius, Celik has suggested investors pay attention to the process.

As the market continues to slow, crypto companies like Coinbase have made drastic cuts in their workforce and are adjusting to what many believe will be a prolonged truce for digital tokens.

Source: TRT World

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