Before we proceed, what exactly is meant by Crypto Markets?
Crypto markets are decentralized, which means they are neither issued nor supported by a centralized body like a government. Rather than, they are dispersed throughout a computer network. On the other hand, Cryptocurrency may be purchased and traded on exchanges and held in ‘wallets.’
Now, let’s look at some factors contributing to the massive crypto market fall.
The Luna-Terra collision
It all started with the Luna-Terra debacle. It was a disastrous incident for not only its investors but for the whole crypto economy. Many investors lost their life savings in Terra currency, a stable coin with a market valuation of more than $18 billion before the meltdown.
Stable coins are designed to be valued the same as the US Dollar or another fiat entity. They exist primarily to allow crypto investors to enter and exit the fiat with no third party (in this example, a bank) to authorize these transactions. Tether (USDT), USD Coin (USDC), and Binance USD (BUSD), to mention a few, are examples of stable coins. Three of the stable coins, as mentioned earlier, are tied to central bank-issued USD. These organizations have a dollar treasury in the form of cash reserves or commercial papers/receivables that back each coin to $1.
With Luna losing 99.9% of its value, Terraform Labs (the firm behind Terra) devised a strategy to sell their entire Bitcoin reserve to restore the peg to $1, which they ultimately failed to achieve. As a result, it wiped away more than $40 billion from the Cryptocurrency market.
The Equity Market
The Cryptocurrency market is closely intertwined with the stock market. The crypto sphere is witnessing the same fall as the stock market. According to data obtained from Experts, Cryptocurrency prices increased and declined similarly to equities prices in late 2021 and into mid-2022. If you look at the S& P 500 chart, you can see that tech stocks like Amazon, Tesla, and Apple have dropped more than 6%. In the stock market, this is a huge thing. In the crypto market, a similar pattern was observed. Recently, Bitcoin, Musk’s Dogecoin, and Ethereum dipped below $23,000.
Bitcoin’s price movements are very similar to NASDAQ’s, a stock index heavily weighted towards tech businesses. While crypto markets should ideally behave independently of traditional markets, they have proven subject to financial market changes.
Increase in interest rates
The US Federal Reserve has agreed to raise interest rates to reduce inflation. According to a Wall Street Journal story, the Fed will pursue an aggressive campaign to raise the cost of debt, restrict spending, and reign in record-high inflation. The fast rise in interest rates is widely seen as a leading indication of a recession.
Following the announcement, both the stock market and the crypto market experienced significant declines; investors lost faith and began selling off their digital assets, resulting in the carnage in the crypto market.
For cryptos, 2022 has been a wild ride. The Bitcoin market fell in January before rising again in February. World governments have scrutinized the global crypto industry as they attempt to regulate cryptos.
In India, the crypto legislation has yet to be enacted. The Bill in India wants to outlaw all private cryptocurrencies. The country also levied a 30% duty on crypto investors and a 1% TDS on all crypto assets. India does not presently regulate Cryptocurrency and will not legalize it.
Russia’s central bank proposed a ban on Cryptocurrency usage and mining on Russian territory beginning in January 2022, citing worries about financial stability, inhabitants’ well-being, and the country’s monetary policy autonomy. Regulatory limits have made it difficult for investors to determine if investing in Bitcoin is the best option.
The introduction of Bitcoin has spurred a discussion over its and other cryptocurrencies’ futures. Despite recent obstacles, Bitcoin’s success has fostered the development of competing cryptocurrencies such as Ethereum, Litecoin, and Ripple since its foundation in 2009. A Cryptocurrency that aspires to be a part of the mainstream financial system must fulfill a number of criteria. While that likelihood is remote, there is no question that Bitcoin’s success or failure in coping with the problems it confronts will have a significant impact on the fortunes of other cryptocurrencies in the years ahead.