On Monday, Bitcoin plummeted, temporarily falling below $30,000 for the first price since July 2021. The value of the world’s most valuable cryptocurrency has dropped to less than half of what it was in the fall. Other cryptocurrencies, such as Ether and BNB, have witnessed similar drops, and trading volumes on key exchanges have also decreased. Some analysts are already predicting a “crypto winter,” in which the sector’s incredible rise is followed by a period of collapse.
A mixture of short- and long-term inputs, including broader financial markets and the fall of a major stablecoin, are causing the present decline of Bitcoin and other cryptocurrencies. Here are some of the primary causes of the present downturn.
The remainder of the financial market is linked to Bitcoin.
Crypto enthusiasts have long anticipated that crypto’s independence will make it immune to inflation and catastrophes. Bitcoin, the most popular cryptocurrency, is controlled by no one issuer or government. Many believed that Bitcoin’s independence from the government would ensure that its value would not be eroded by economic downturns, foreign conflicts, or severe policy changes.
However, the previous several years have demonstrated that this is untrue. When the coronavirus outbreak wreaked havoc on global markets in March 2020, Bitcoin took a 57 percent hit. Analysts think that a mix of free time, disposable income, and pandemic-relief money injected into the world by governments allowed stock markets and cryptocurrencies to rebound and rise at a stunning rate.
Investors have recently been afraid of change, as inflation has prompted the Federal Reserve and other central banks to boost interest rates. Bitcoin, which fluctuates violently by nature, may appear excessively dangerous for investors searching for a secure harbor.
Bitcoin’s collapse follows the Dow and Nasdaq’s greatest single-day losses since 2020, as well as the S&P 500’s lowest point in the previous year. Russia’s invasion of Ukraine has upset the market, exacerbating inflation, supply chain concerns, and oil prices. Financial concerns are also being exacerbated by China’s slowed economy in the face of COVID-19 outbreaks. Some crypto enthusiasts expect that Bitcoin’s price will divorce from the stock market in the future, but for the time being, the two remain inextricably linked.
Cryptocurrency is inherently risky.
However, with the promise of a boom comes the risk of a bust. There have been numerous big bear and bull cycles since Bitcoin’s launch in 2009, with short-term speculators filling the market and then abandoning it. Many exchanges provide fundamentally dangerous proposals, allowing traders to invest using borrowed crypto, especially during peak times. A lack of actual cash flow can contribute to even quicker free-falls if prices start to collapse, whether owing to significant investors dumping their shares or other factors.
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The number of people that invest in cryptocurrency at any particular time is also very variable: According to crypto company Grayscale Investments, more than half of traders who owned crypto by the end of 2021 had only entered the market that year. It’s also no coincidence that crypto collapses tend to happen on weekends. Investors tend to check out at this time, allowing those who are making trades to make greater ripples.
Regulators and security breaches are causing concern.
Because the value of crypto is derived in part from people’s belief in it, skepticism or legislative changes might cause markets to tremble. Bitcoin fell from $65,000 in April to $35,000 in June as a result of China’s restriction on bitcoin mining in mid-2021. Elon Musk said in May 2021 that Tesla will no longer accept bitcoin for payments due to environmental concerns, and the overall market valuation of crypto plummeted around the same time.
Many crypto investors have been watching with bated breath as governments in key crypto trading and mining nations, such as the United States, China, India, and Germany, have pushed toward regulation. Meanwhile, a slew of cyberattacks and security breaches have rocked the crypto world, including a $600 million hack of the Ethereum sidechain Ronin.These thefts have shattered consumer trust in cryptocurrency and hampered the inflow of new potential consumers.
According to Edward Moya, senior market analyst at Oanda, the number of real-world use cases that might attract newcomers to the crypto industry is decreasing this year. “There’s a perception that widespread acceptance [of Bitcoin] will take much longer than anticipated,” Moya added. “Right present, it appears like the crypto market is in a holding pattern.”
Some analysts feel that UST, TerraUSD, one of the major stablecoins, struggled recently, contributing to the latest Bitcoin drop. TerraUSD, also known as UST, is a token that is intended to always be worth $1, but it plummeted below 70 cents on Monday when scared investors sold off their tokens in a simulated bank run.
The Luna Foundation Guard, which protects the stablecoin, emptied its $1.3 billion bitcoin reserve and acquired $850 million more in Bitcoin to preserve UST’s price. “That [move] may create considerable sell pressure on bitcoin and drive markets down with it,” said Corey Miller, dYdX’s growth lead.In the same article, Caleb Franzen, a senior market analyst at Cubic Analytics, described how “historically bad performance” and “historically negative sentiment” might result in a “continuing selloff,” which has a negative influence on pricing.
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It remains to be seen whether the crypto bear market persists.
Some worry that as more investors panic, things will only get worse. When the price of Bitcoin fell below $30,000, however, believers “bought the dip,” or joined the market at a reduced cost, and the price corrected. They predict that, despite the day-to-day instability, Bitcoin will maintain its zoomed-out growth trend of the previous decade.