2022 has been a hard year for the crypto market. In May, Bitcoin plunged by over 50% from the all-time high in November last year. Ethereum, on the other hand, has witnessed a similar situation over the last couple of months, with its value going down by 60%. The second-largest cryptocurrency by market capitalization jumped to nearly $4,900 a coin in fall 2021.
Similarly, smaller alt-coins have also suffered significant losses. Investors who have previously enjoyed great success in the crypto space seem to be asking only one question: why is the market crashing so steeply? The crypto market, just like other financial markets, is not prone to macro-financial shocks or external factors that affect the global economy.
These are highly precarious times for the stock market, international geopolitics, and the global economy. Here are the top reasons behind the crypto market crash:
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1. Inflation
Though cryptocurrencies are supposed to be prone to inflationary pressures, major cryptocurrencies like Ethereum and Bitcoin have not been able to act as an inflation hedge like gold.
The failure of cryptocurrencies to remain steadfast over the past couple of months is due to the severity of economic overheating. The yearly inflation rate in the U.S. reached 9.1% in June this year, the highest in over 40 years.
With commodity prices soaring and interest rates going up, people may be withdrawing their money from non-essential investments like cryptocurrencies for many.
2. Post-pandemic Effects
The global pandemic of 2020 engendered a massive downturn whose aftereffects are still visible in some markets. With travel restrictions and countrywide lockdown, people couldn’t spend money on recreational experiences like travel, concerts, sporting events, and dining. Some people killed boredom by playing online games at betFIRST Casino, while some started trading stocks and cryptocurrencies.
From March 2020 to March 2021, both the stock market and incipient markets like cryptocurrencies received billions in investment. This led to an upswing in the crypto market which lasted for months and ultimately reached all-time highs in cryptocurrency values in the fall of 2021.
However, as the world reopened and people regained more options as to how they can spend their money, cryptocurrency suddenly lost a lot of money. The pandemic-ers effects officially wore off in March of this year and cryptocurrencies have regressed to a pre-pandemic era.
3. The Volatility of Risk Assets
People are starting to view cryptocurrencies the way they view stocks. This is because cryptocurrencies like Bitcoin and Ethereum have long been endorsed by crypto fans as powerful alternatives to the stock market.
Stocks are high-risk, high-reward assets that may not be the ideal investments during times of uncertainty or geopolitical tensions. The correlation of crypto with stocks has made people withdraw investments from cryptocurrencies.
4. The Russia-Ukraine War
The ongoing Russo-Ukraine war may also be adversely affecting crypto prices. When geopolitical tensions are high, people are not comfortable investing in volatile assets like cryptocurrencies.
During times of geopolitical uncertainty, people prefer investing in safe, conventional assets like real estate. If something disastrous were to happen on the global stage, high-risk assets like crypto would be the most vulnerable.
