The recent plunge in the cryptocurrency market has prompted some investors to question whether the current state of the industry is sustainable. One analyst compares it to the 1987 stock market crash, when it took several months to recover. However, since crypto moves faster than equities did in the 1980s, the market may recover sooner. For now, though, investors should take note of the following factors to avoid further losses. In addition, read on for some possible answers.
Volatility
The cryptocurrency market is expected to be volatile over Memorial Day weekend. Low liquidity levels and increased leverage could contribute to huge price swings. Furthermore, the Federal Reserve has reduced liquidity, so many investors are using debt to fund their futures positions. All of these factors could make the crypto market volatile in the coming months. Here’s what to expect:
Cryptocurrency prices have plummeted by more than 50% from their highs of November. The decline in price may be amplified by the upcoming Memorial Day holiday. On Friday, Bitcoin was trading at $28,800, while Ether was trading at $1,700. The two cryptocurrencies have lost over 52% of their value from the start of 2021. The declines could be made even worse if the cryptocurrency market is closed for Memorial Day weekend. During the same weekend, the cryptocurrency market declined by 35% in 2020 and 43% in 2021.
Regulation
As more institutions and individuals purchase cryptocurrencies, the market has fallen precipitously in recent weeks. Critics say this collapse was inevitable, and others compare the resulting panic to the 2008 financial crisis. Still, it’s not clear exactly why the market has plunged to the level it is today. We have to look at some of the bigger picture factors, such as China’s recent announcement to clean up its virtual currency mining industry.
Rising inflation and interest rate conversations are also contributing factors. The latest announcement from Federal Reserve Chair Powell, signaling that the central bank will raise interest rates in the near future, is no help to crypto. Interest rates, after all, aim to combat inflation. Meanwhile, the collapse of the crypto market may have roots in the tech sector. As a result, the cryptocurrency industry may face an even greater crisis than it already is.
China’s ban
The Chinese government recently banned the trading of cryptocurrencies in China, which is not a surprise, as it has long been dubious of the technology. The People’s Bank of China has also expressed its concerns over crypto as a means of facilitating financial crime and capital flight. China is not alone in this regard, as governments from all over the world have voiced their concerns over digital currencies.
The Chinese government’s decision to ban cryptocurrency may be tied to the common prosperity drive, which highlights a more statist approach to managing the economy. This program is meant to curb capital flight and encourage domestic circulation of the wealth of the people. If the wealthy were allowed to circumvent capital controls, wealth redistribution in China would be more difficult to achieve. Thus, the ban on cryptocurrency is likely to be tied to the common prosperity drive, which China has been pursuing to halt the outward flight of capital.
Tether’s loss of peg to dollar
The collapse of TerraUSD has spilled over into other cryptocurrencies, including bitcoin and ethereum, which all shed at least 5% in price over the past week. Dogecoin fell by a staggering 35%. The collapse of Tether‘s peg to the dollar has been blamed in large part on the fact that investors aren’t sure whether the tokens are really backed by real currency. But that’s not the only reason why tether has been hit hard by the price drop. Tether has been widely criticized for not being transparent enough about the quality of the commercial paper it uses to back its tokens.
While Tether’s depeg from the dollar impacted the value of the cryptocurrency, it did not affect the value of the USDC or the UST. These stablecoins are algorithmic and are backed by trillions of dollars in reserves. If the price of USDT falls, it will devalue as well. This could be a major cause for the crypto market’s decline today.
Coinbase’s quarterly loss
Bitcoin and other cryptocurrencies have plunged 59% since their high in November 2021. Bitcoin is down more than 30% this week, while Ether is down by more than 40%. This drop is particularly alarming because the price of Bitcoin will hit $21,000 – the threshold for a death spiral. But while the market is not yet flooded, it has been dominated by tech stocks such as Amazon, Netflix, Facebook, and Google.
The reason that Bitcoin is down 35% is that it is being targeted by governments, which have cracked down on privately-operated currencies. Coinbase has recently reported a 35% loss in quarterly revenue compared to analysts’ expectations of $1.48 billion. While retail trading fell 38%, institutional trading rose 9%. And although the crypto market has fallen, this isn’t a time to panic.
Luna’s 99% loss of value
The founder of the Luna Foundation, Do Kwon, tweeted that the coin should regain its peg. However, the market price of LUNA is currently far from its previous high of more than $100. If LUNA is to recover from its current slump, it would take burning up a lot of its circulating supply. As a stablecoin project, there is a risk of falling prices, but investors should not blame the project’s founders for the drop. They should be reminded of the inherent risk of this project.
The LUNA fiasco exposed some weak links in the algorithm-based stablecoin ecosystem. While TerraUST was initially associated with the US dollar, this was found to be ineffective. Because of this, it created a domino effect that shook the market and caused both coins to drop in price. Crypto experts and professional investors are assessing the situation. Enrique Moris, a crypto expert, sees the drop as “normal” and the overall market affected.