The Latest Crypto Market Crash: Not the First Time
Table of contents:
- History of Crypto Market Crashes: Exploring the Factors
- Too Much Leverage
- Cryptocurrency Regulation
- Crypto Breaches
- Excessive Alternative Cryptocurrencies
- Negative News Coverage
- Why is the Crypto Market Crashing Again?
- The Fall of Terra
- Increased Interest Rates
- The Downfall of FTX
- Market Speculation and Manipulation
- Can Cryptomarket Crashes be Preventable?
- Investor Education
- Promoting Safe Investment Practices
- Crypto Regulation
- So What is the Current State of the Market?
- Frequently Asked Questions
The crypto market is notorious for its volatility and has faced criticism from governments and their institutions. From the second quarter of 2022 till now, the market has once again displayed its notoriety with a chronic bear market. The value of Bitcoin, Ethereum, and other altcoins has dropped massively, causing fear and skepticism among investors and traders. As a result, the market is rife with speculation, rumors, and concerns.
Several factors have been implicated in this market downturn and this article will explore these factors. It will also analyze the market and discuss market trends that have led to this moment.
The first major crypto crash was in April 2011 when the market was rocked by some of the biggest heists in crypto history. From Mt. Gox losing 25,000 BTC to MyBitcoins suffering a 10,000-bitcoin hack, these heists and others were significant enough to cause Bitcoin to shed 99% of its value.
Another major crash happened in 2013 due to China’s clampdown on Bitcoin and other cryptocurrencies. Also, around the same period, Mt. Gox stopped its trading activities and filed for bankruptcy after losing another 850,000 bitcoins. The result? The crypto market sank further in value.
The same scenario played out between 2018 and 2021 as the market experienced periods of downturns due to hacks, restrictions from tech companies like Facebook and Google, and environmental controversies.
Table showing some of the major bear markets
|1st Bear Market||2011 - 2013|
|2nd Bear Market||2013 - 2017|
|3rd Bear Market||2017 - 2020|
History of Crypto Market Crashes: Exploring the Factors
Although we’ve already highlighted some of the reasons implicated in crypto market crashes over the years, below we explore the factors in detail. They include over-leverage, crypto regulations, security lapses, the plethora of altcoins available, and negative press.
Too Much Leverage
Excessive leverage was one of the causes behind the past collapse of the cryptocurrency market. Through leverage, investors increased the amount of money they could potentially make from their trades by borrowing money to trade on the market. However, leverage, being a risky strategy, especially in a highly volatile market like crypto, also amplified their losses. Many investors who took too much leverage were forced to sell their positions, leading to a downward spiral in the crypto market.
Increased regulation in some nations, notably China and the US, was another factor behind the crypto market meltdown. Investors were hesitant to invest in cryptocurrencies as a result of these governments cracking down on cryptocurrency-related activities such as crypto mining and crypto trading. The United States, particularly, schemed ways to control the crypto space and or suffocate the industry in any way it can.
Security lapses within the cryptocurrency market played a huge role in causing the market to shed its value. As the market recorded several scams and hacks, there was heightened skepticism and decreased demand for cryptocurrencies since investors became wary of crypto investments. Security breaches such as the Mt. Gox hack, the Ronin Bridge hack, and the Wormhole Bridge exploitation caused investors to panic and had a significant impact on the market. The market experienced a sustained downturn as it took time before investors and traders could trust the market again.
Excessive Alternative Cryptocurrencies
With Bitcoin gaining global recognition and acceptance, a swarm of alternative cryptocurrencies hit the market. Thus, while the overall crypto market size got bigger, the slice of the pie for investors and traders got smaller. This birthed disinterest among investors and caused a downward trend in the market.
Furthermore, as the number of altcoins grew, rookie investors and traders plunged neck-deep into these new markets as they searched for the next Bitcoin or Ethereum. Scammers thus had a field day exploiting this uncontrollable greed and fear of missing out. As people got scammed, their interest and demand for cryptocurrencies dipped, and the market consequently dropped in value.
Negative News Coverage
If most governments fight cryptocurrencies and media houses are tools of the government, then it is easy to see how negative press contributed to some of the bear markets in history. Media houses never failed to project the crypto space in a bad light anytime it suffered a security breach or market downtime. They casted aspersions on the reliability and security of cryptocurrencies and harmed the market's reputation.
For instance, the Mt. Gox attack in 2014, which resulted in the theft of around 850,000 bitcoins valued at more than $450 million at the time, stoked investors’ dread. The press made it look as if it were an issue unique to cryptocurrencies, as if other financial systems were not prone to security breaches. Therefore, investors found it challenging to maintain their optimism in the crypto sector. Each unfavorable press coverage increased investors’ fear and uncertainty, reduced interest and demand, and pushed prices lower.
Why is the Crypto Market Crashing Again?
The latest crypto crash started in early 2022 but became really significant by the second quarter of the year. May 2022 saw the three biggest cryptocurrencies lose a significant chunk of their value. Bitcoin nearly lost 40% in value while Ethereum and Binance Coin (BNB) were down by 48%. Even the stablecoins tied to the United States dollars were not spared.
However, unlike previous crashes that were caused by hacks and suffocating regulations, some of the causes of this hack were unprecedented. Unscrupulous actors did not hide behind the scenes this time. They were daring enough to show themselves and deceive a myriad of crypto investors—from retail to institutional investors. Also, macroeconomic dynamics played a major role in plummeting the market’s value.
Below are some of the reasons why the crypto market is crashing now.
The Fall of Terra
LUNA, the native cryptocurrency of the Terra ecosystem, was one of the most popular and most valued cryptocurrencies. It was also claimed that it underpinned the stability of the ecosystem’s stablecoin called Terra USD (UST). However, by May 2022, the crypto space discovered it was all a lie. It was not long before the so-called stablecoin lost its peg and LUNA lost 99.9% of its value.
The de-pegging of UST and the gross devaluation of LUNA spilled into the entire crypto market. The overall crypto market lost tens of billions of dollars as investors lost confidence in the system.
Increased Interest Rates
In 2022, inflation reached historic levels in the United States and other regions of the world, which led to price increases. In light of this, the US Federal Reserve, the central banking system of the US, raised interest rates to lower inflation by limiting the amount of money in circulation.
Financial markets, including the cryptocurrency market, are significantly impacted by interest rates. Higher interest rates raise the cost of borrowing, making leveraged investments in cryptocurrencies more expensive for investors. As a result, there is less of a demand for cryptocurrencies, which drives down the cost.
Furthermore, investor sentiment is impacted by an increase in interest rates. As borrowing costs rise, investors become more circumspect, which in turn causes demand to fall and prices to drop even further. Additionally, higher interest rates could result in the US dollar strengthening, which would hurt the cryptocurrency market. Since cryptocurrencies are valued in US dollars, a stronger dollar lowers their value and causes prices to drop even further.
The Downfall of FTX
FTX was one of the fastest-growing exchanges. As a matter of fact, many projected it as the long-awaited rival of Binance. However, by November 2022, it was discovered that the entire FTX empire was built on a lie. Its balance sheet showed that the company’s assets were mainly made up of its native token, FTT. This raised suspicion among investors. And when Binance liquidated its FTT holdings, it was not long before FTX went bankrupt.
The cryptocurrency market was shaken by the collapse of FTX. FTX collapse set off a contagion that has never been seen before in the cryptoverse. Companies that had investments with FTX or that had indirect exposure to the company began to experience financial meltdowns. Affected companies include Genesis, Galaxy Digital, BlockFi, and Sequoia Capital, among others.
These unexpected developments caused a high level of skepticism and mistrust among crypto investors. Also, governments and their media agencies did not fail to exploit the mishap to paint crypto in a bad light.
Market Speculation and Manipulation
Buying and selling assets with the intention of profiting from price changes rather than the underlying value of the asset is referred to as speculation. In the context of the cryptocurrency market, speculation frequently results in a focus on short-term price changes rather than the technology's long-term potential or the coin's intrinsic value. Market bubbles can result from speculation, in which prices rise quickly as a result of market hype and speculation before collapsing when the bubble bursts.
A major offshoot of speculation is market manipulation. High net-worth investors or institutional investors whose crypto holdings can significantly impact the market sometimes manipulate the market to profit at the expense of novice investors or traders. The crypto market is particularly susceptible to manipulation because it is largely unregulated.
Cases of market manipulation include insider trading and the artificial inflation of the price of an asset. In these cases, these investors buy at lower prices, inflate the asset’s trading volume, lure unsuspecting investors, and sell off their holdings. This practice causes the market to crash and also increases fear, uncertainty, and doubt among investors.
Can Cryptomarket Crashes be Preventable?
Irrespective of the volatility of the crypto market, there are possible means to prevent further market crashes. Some of them include:
Increasing investor education and encouraging transparency can lessen the incidence of collapses. Due to the potential for big returns, the cryptocurrency market attracts a lot of investors who might not completely comprehend the risks involved. Regulators and industry participants can aid in preventing speculation and supporting better decision-making by educating investors about the dangers and advantages of investing in cryptocurrencies.
Promoting Safe Investment Practices
Promoting safe investing practices is another strategy to lessen the chance of collapses. Cryptocurrencies are extremely volatile investments, and investing in them should be done with extreme caution. Investors should never invest more than they can afford to lose, and they should diversify their portfolios to decrease their risk exposure. Regulators and industry stakeholders can assist to prevent bubbles and crashes caused by excessive speculation by supporting prudent investing practices.
Another strategy to avoid crashes is to boost market liquidity. When compared to traditional financial markets, the cryptocurrency market is relatively small, and it can be difficult to sell large amounts of cryptocurrency without significantly affecting the price. By improving market liquidity, investors can buy and sell cryptocurrencies more readily, minimizing the possibility of rapid price decreases caused by panic selling.
Increased regulation can also prevent crashes. While regulation can be a double-edged sword, with too much regulation potentially stifling innovation, it can also aid in fraud prevention and transparency. Regulators and industry stakeholders can help to build a more stable and sustainable cryptocurrency sector by striking a balance between regulation and innovation.
While it may not be possible to completely prevent crashes in the cryptocurrency market, these steps can reduce their likelihood and mitigate their impact.
So What is the Current State of the Market?
It's 2023 and crypto prices are still low compared to their all-time high. In 2022, cryptocurrencies fell greatly. Scandals and bankruptcies shook several prominent and well-known names in the industry, against a backdrop of roaring inflation and costly anti-inflation initiatives. It is impossible to predict the future of the crypto market with absolute certainty. There might be heavy crashes or the crypto market may return to its all-time high.
The collapse of crypto-friendly banks such as Silvergate Bank, Silicon Valley Bank, and Signature Bank has raised concerns about the stability of the traditional banking system, even though centralized financial institutions are trying to pin the collapse on crypto. So far, they have done that without much success since investor perceptions are now in favor of decentralized finance. This is looking good for the crypto market as it could mean an increase in demand in the market.
The crypto market has crashed before and bounced back later. This time may be no different. Also, the feasibility of cryptocurrency is linked to the technology that powers it: blockchain. And, with the rise of the metaverse, NFTs, and even NFT gaming, cryptocurrency technology appears to be more prevalent. Instead of investing in unreputable cryptocurrencies, it is best if crypto experts and investors invest in firm and stable digital coins such as Ethereum and Bitcoin. Alongside this investment, they should also expose themselves to the volatile crypto market to a level that their risk appetite can tolerate.
There are several uncertainties and assurances concerning the crypto market. It is better to observe the market before committing an investment into it. The factors that contributed to the downfall of the crypto market were unpredictable and the next too may be unpredictable. Impulsive and reckless decisions ought to be out of the radar.
Frequently Asked Questions
When will the crypto market crash again?
There is no stipulated or assigned time for the crashing of the crypto market. The crypto market is volatile and can crash at any minute due to some factors such as regulations, negative news, and so many others.
Is the crypto market crashing again with everything in red?
It could crash and it could also hit the roof. The crypto market experiences price fluctuations which could affect its present position.
Will the Bitcoin market fall again?
In the past, Bitcoin has experienced significant market corrections, with prices declining sharply. However, Bitcoin has also demonstrated resilience and has rebounded from these dips, often reaching new all-time highs in the process. It's important to keep in mind that Bitcoin may fall and rise again.
Is there any hope for the crypto market to recover from this crash?
While the current market crash may seem concerning, there is still hope for the crypto market to recover. Like any other market, crypto is subject to fluctuations that can be influenced by a variety of factors, including policy changes, supply and demand, and investor sentiment. Therefore, with more positive news and regulatory clarity, the crypto market can increase in value again.
What should I do if I've already invested in crypto and now it's crashing?
If you've already invested in crypto and are now experiencing losses due to the current market crash, it may be a good idea to evaluate your investments and consider diversifying your portfolio. Also, bear in mind that investing in crypto comes with significant risks, and it's crucial to be prepared for market volatility. A popular piece of advice in crypto quarters is for you to do your own research and consult with a financial advisor before making any investment decisions.