Crypto Crash | Cryptocurrency | Bitcoin | Ethereum | Altcoins | Stablecoins | Terra
The following article provides an overview of the current state of the crypto market and attempts to analyze what caused the crypto crash.
“The crypto market cap has crashed below $1 trillion for the first time since January 2021.Not even the bear market last summer took the crypto market so low. Back during a crypto crash in July 2021 the crypto market cap did not fall below $1.2 trillion”
According to the Crypto Fear and Greed Index investor sentiment is now "extreme fear" as Celsius, a cryptocurrency lending platform, paused all withdrawals.
The strong sell-off in the entire crypto market also caused a massive price correction for Ethereum in the last seven trading days. Ethereum is down 40% in the past week. According to a calculation by Crypto Slate, ETH mining is no longer profitable in the US. The drop in the exchange rate along with rising energy prices makes it almost impossible to mine at a break-even level.
Bitcoin drops 65% from all-time high.
Other altcoins are deep in the red as well.
Sharply declining volume across all chains and categories
Images Credit: THE BLOCK (https://www.theblock.co/data/nft-non-fungible-tokens/nft-overview)
Public companies with bitcoin holdings
Monetary policy shift
The ultra-loose monetary policy of national banks has led to a lot of liquidity in the market. This has fueled the performance of risk-sensitive assets in particular. Risk-sensitive assets include digital assets as well as technology stocks. With the end of the loose monetary policy and the coming interest rate hikes, these assets in particular are negatively affected.
“Technology stocks and cryptocurrencies — the speculative darlings of the easy money era — are now very vulnerable as the Federal Reserve shrinks its nearly $9 trillion balance sheet.”
These assets, which benefited from the liquidity of the loose monetary policy, are now being sold.
“This is where the volume of capital and the amount of liquidity has been most beneficial in that its withdrawals are being realized – and this is in the most speculative parts of the market. ” - Lisa Chalet, chief investment officer at Morgan Stanley Wealth
“Bitcoin is often referred to as “digital gold” by its backers. The term refers to the idea that bitcoin can provide a store of value similar to gold — one that’s uncorrelated with other financial markets, like stocks."
A characteristic that was often falsely attributed to cryptocurrencies finally disappeared. It became apparent that cryptocurrencies do not offer any protection against inflation but are rather a highly correlated risk asset. It is therefore not surprising that the correlation between bitcoin and the Nasdaq 100 increases in the event of a risk-off.
The argument that cryptocurrencies are essentially "digital gold" is becoming increasingly difficult to defend.
The Panics - Initial shock
"The collapse of TerraUSD has started what we used to call 'the panics', when major financial institutions sold off large chunks of assets and everyone else tried to take their money out as quickly as they could," economist Frances Coppola said.
In addition to the fundamental and macroeconomic factors, the collapse of TerraUSD triggered a panic selling in the markets.
This collapse led to enormous uncertainty throughout the market. Besides the price collapses, the uncertainty was also seen in other stablecoins such as USDT. The price of USDT temporarily detached from the 1:1 USD peg.
What many investors fear, and what is also reflected in the sentiment index, is that this initial shock will trigger a chain reaction as exchange users rush to liquidate their holdings.
It is clear that these price declines, triggered by panic and uncertainty, are spreading to more and more projects and having negative consequences. Some examples:
"Celsius is battling either insolvency or it’s experiencing severe liquidity troubles as a result of the crypto market plunge. The firm paused withdrawals on Monday, and also reportedly shifted around $320 million worth of assets to pay down loans and avoid liquidation on decentralized finance (DeFi) platforms such as Aave. "
"The price of Lido Staked Ethereum (stETH) has diverged sharply from the price of Ethereum (ETH) in the last 48 hours. Theoretically, however, the stETH token in supposed to trade at a 1:1 peg to ETH."
"Just a month after TerraUSD lost its peg against the US dollar and crashed the global crypto markets, another stable coin threatened to repeat the story once again this month. But a sound strategy appears to have helped avoid the disaster till now. The price of Tron (TRX) coin fell to nearly $0.045 after the blockchain’s recently launched algorithmic stablecoin USDD lost its peg against the US dollar. The stable coin had slipped to a low of $0.976
In addition, the risk of stricter regulations is having a negative impact on prices.
"The ongoing crisis has raised new fears that market regulators could put the kibosh on the nascent crypto lending businesses that have positioned themselves as alternatives to traditional banks."