2022 has been a difficult year for the global crypto trading market, with the continued drop in prices of major coins like Bitcoin. This price decline has been further exacerbated by various notable crypto events such as popular exchanges and coin crashes.
Moreover, certain macroeconomic factors have also factored heavily into this dramatic shift in prices. As a result of these changing conditions, the entire crypto market is confronting an uncertain future as it looks toward 2023.
Let’s find out why the crypto market is going downhill and what’s fueling it.
Why is crypto crashing? Five reasons behind it
The rise of crypto trading has been nothing short of dramatic, but despite its explosive growth, there have been several crashes where the value of digital assets dipped significantly. However, compared to the past, the primary factors behind the price fluctuations in Bitcoin have changed.
What was previously attributed to crypto-specific events now appears to be closely tied to macroeconomic factors and market movements, echoing similar trends in traditional financial markets. Let’s see why:
Increasing interest rates
In recent months, the rising interest rates have had a major influence on the crypto markets as prices of different cryptocurrencies have continued to fall.
As a result of heightened inflation and record-high prices, central banks like the United States Federal Reserve have opted to raise interest rates, which has had an adverse effect on Bitcoin's price movement.
According to the Wall Street Journal, the Federal Reserve plans to take radical measures to increase bond prices, decrease spending and fix record-high inflation.
Not only does such monetary policy action weaken investors' faith in purchasing cryptos, it also affects the entire market overall by driving investors to choose other markets or assets over cryptocurrencies. To put it simply, increasing interest rates and sharp inflation are two major reasons why BTC has been going in the red lately.
Lack of liquidity in the market
The biggest problem in crypto markets when massive liquidations occur is the market's liquidity. Unlike stocks, where there is usually a wealth of buyers ready to purchase unloaded assets, such is not always the case when it comes to cryptocurrencies.
This lack of availability of buyers can cause stunning market crashes on weekends, putting cryptocurrency holders at risk and showing how easily liquidity issues can arise in the crypto markets.
This unhinged nature of prices requires greater caution and attention when engaging with crypto; an example is actively checking the markets even on weekends, just in case any unexpected liquidation events occur.
For example, when a whale (an individual who owns large quantities of cryptocurrency) decides to sell their holdings of a particular coin or tokens, it can have ripple effects across the entire market.
This large-scale sale dumps coins into the wider market and leads to reduced demand as investors are likely to be scared off by sudden drops in price created by the whale’s actions.
In instances of market manipulation by whales, this strategy amplifies as the majority of assets are sold off rapidly. This Whale-induced volatility has become a prevalent feature in the cryptocurrency markets, specifically for those interested in making a profit from their investments.
Although there have been recent efforts by governments and blockchain projects to combat market manipulation, whales can still significantly influence price shifts. Consequently, investors should be informed about what leads to volatility and always have an exit plan ready.
Terra Luna crash
The Luna-Terra fiasco of 2021 is a vital example of the risk involved when investing in cryptocurrencies. The momentous drop of 95% or more sent shockwaves across the industry and caused other digital currencies to dive similarly.
It seemed as if there was no resounding recovery, with most coins suffering a prolonged downturn on price charts. Its severe consequences demonstrated the importance of research and diligence while choosing an investment for individual investors and the crypto ecosystem at large.
The crash destroyed Terra coin's market capitalization, a stablecoin into which many had invested their entire life savings, reducing it to zero overnight.
This dangerous event highlighted just how high the stakes can be when pursuing investments in cryptocurrency markets and will be remembered as a cautionary tale for years to come.
The war in Ukraine
The ongoing conflict in Ukraine is certainly hurting crypto trading. When geopolitical turbulence is high, individuals and investors typically turn to sources they deem safe and reliable, such as stocks and bonds.
Cryptocurrency fails this criterion; it's simply too risky to be perceived as trustworthy when larger variables are at play. Example: If any given political episodes were to create seismic shifts in the global economy, more volatile investments - like digital currency - may fare much worse than their traditional counterparts.
Until the rift in Ukraine begins to heal or a similar resolution is found for other significant conflicts worldwide, cryptocurrency may continue to see the limited appeal and weak price points.
Cryptocurrency regulation
When China suddenly outlawed crypto mining in June 2021, the implications for crypto investors were profound. This large-scale exodus of miners to other jurisdictions that better suited their industry immediately impacted the network hash rate.
The Chinese government doesn't mess around when it comes to cryptocurrency. In June 2021, they told banks and payment institutions to halt crypto transactions. Then in September 2021, all crypto transactions were made illegal, including mining bitcoins.
The network hash rate is essentially a measure of how many calculations a miner can make per second; these calculations allow them to mine coins and are directly related to cryptocurrency prices.
In theory, when prices decline, the hash rate should too. Conversely, the hash rate may also increase if prices begin to rise again. Therefore, crypto investors should closely monitor changes in the hash rate so they can act accordingly.
Conclusion
These are only a few potential reasons for crypto trading prices to drop so suddenly. It's important to remember that Bitcoin and other digital assets are still in their infancy; as the industry grows, we may see less price volatility.
In the meantime, it's crucial to stay up-to-date on news and events that could affect the price of your crypto holdings.
