Reasons why crypto is falling this year

Most financial markets go through cycles. The crypto market saw a massive upswing following quantitative easing by the US Federal Reserve. This rally replaced the consolidation observed at the height of the coronavirus pandemic in March 2020. We saw the markets rise to new highs. Bitcoin created its latest all-time high, reaching over $68,000 in November 2021.

However, the crypto market has been in a downward spiral since the start of this year. Bitcoin has lost almost two-thirds of its market value when we measure the price of BTC from the highest record in November 2021 to the present date. Not only BTC, most cryptocurrencies, along with Ethereum, have fallen heavily by touching the ground at their lowest ever. 2022 has been a bit of a tough year for the entire crypto market due to various reasons. Here are the most prominent ones that led to market dips.

Uncertainty around COVID-19

Although Bitcoin had been largely capped since December 2021, it dropped from $47,000 to $43,000 due to the uncertainty surrounding the new COVID-19 strain, Omicron. Since the beginning of January 2022, people began to fear the increasing spread of viruses across the globe and refrained from investing in crypto.

The war between Russia and Ukraine

Cryptocurrencies crashed again in February when Russia announced war on Ukraine, resulting in the crypto investor community initiating massive sell-offs to protect their portfolios from further price drops. The Ukraine-Russia crisis has halted the rally that the crypto market registered during the previous year.

Increase the interest rate

Together with the Russia-Ukraine conflict, the announcement that the US central bank raised interest rates in February has put even more pressure on market participants. The Fed approved a rate hike of nearly 0.25 percent, the first increase since December 2018, to counter inflation created by the pandemic and war crises. Although there were gains during the Chinese New Year, they were short-lived.

Regulatory ambiguity

Meanwhile, in India, many crypto investors started selling off their crypto holdings after the government announced higher tax rates on crypto gains during the budget session in March. The government has announced a 30 percent tax on virtual digital assets, which will not be offset against losses, and 1 percent TDS on crypto assets.

Collapse of Terra

Although the crypto market has been consolidating since the beginning of April, it began to fall in mid-May after the algorithmic stablecoin Terra collapsed and lost its link to the US dollar. The price of LUNA started falling due to short selling, creating a kind of panic among the crypto holders as most of them lost their money. The event contributed to the market crisis and took Bitcoin to its all-time low. After the stablecoin, TerraUSD, lost its link to the US dollar, falling liquidations appeared. Terra Foundation Group lost a whopping $50 billion!

While this seems massive, this was just the beginning. It was followed by the liquidation of crypto-lending platform Celsius and Singapore-based hedge fund Three Arrows Capital. These events profoundly affected the entire valuation of the cryptocurrency market. And all these happened in a very short time.

Downward trend in the stock market

The crypto market has a high correlation with the stock markets. If a downward trend is witnessed in the stock market, it also affects crypto. In late 2021 and mid-2022, cryptocurrency prices rose and fell in line with stock prices. With tech stocks falling, affecting the NASDAQ and stock indices globally, cryptos like Bitcoin, Ethereum and Dogecoin were affected.

Inflation and collapse

Bitcoin has hit an 18-month low after US inflation hit a 40-year high. Most of the cryptocurrencies that have struggled amid the Fed’s policy over the past few months have been mainly hit. And with the collapse of the Terra/Luna ecosystem, companies like Celsius and Three Arrows Capital witnessed troubling events. Soon after, the Singapore-registered crypto exchange company Vauld stopped the withdrawals. This series of events has created panic among market participants.

Series of events led to early crypto winter

With a series of events affecting the crypto market since the beginning of the year, negative sentiment over the cryptos increased, leading to an extended bear market or crypto winter. Although the fluctuations are not as significant as in mid-May, the market is still low and it may take some time to recover and bounce back, making sharp moves.

However, the market will undoubtedly recover and come back stronger. Any extended consolidation after a bear phase is a good sign for the market. That allows the market to recover and the bulls to get stronger. A bear market removes the bad actors, leaving only the true believers.

While this crypto winter may likely be extended, it will undoubtedly come out stronger.

In the words of PB Shelley: “When winter comes, can spring be far behind?”