In the second week of May 2022, Bitcoin fell brutally, briefly dipping below $30,000 for the first time since July 2021. Surprisingly, the world’s largest cryptocurrency is now worth less than half of what it was in the fall season.
Along with BTC, cryptocurrencies such as Ethereum (ETH) and Binance Coin (BNB), have also seen equivalent falls, while trading volumes have also tapered off on major exchanges. India-based major crypto exchanges, such as WazirX, CoinDCX, Bitbns and ZebPay have also seen trading volume going down.
Why Is Crypto Market Falling?
A mixture of short- and long-term inputs, including broader financial markets and the crash of a major Stablecoin, are causing the present decline of Bitcoin and other cryptocurrencies.
Here are the following reasons.
US Federal Reserve Pledging: With the US Federal Reserve pledging to reduce its $9 trillion debt burden, investors and institutions have taken a pause from the market.
“Given the downtrend of equity and commodity markets across the globe, the same is faced by the crypto markets as well. The trend could be for the short term. We are seeing many who are averaging their positions, so it may not be a bad time to get into cryptos,” says Sathvik Vishwanath, CEO and co-founder, Unocoin, a crypto exchange.
Purshottam Anand, CEO of Crypto Legal said that the recent downward spiral movement in crypto prices do not seem to be caused by any crypto-specific reason. The raising of interest rate by the Federal Reserve should be looked at as the immediate reason for the crash, but broader financial and economic factors including the Russia-Ukraine War crisis, along with supply chain woes should also be factored into to assess the future outlook.
Stablecoin Factor: With the recent fiasco over Stablecoin, the market has constantly tumbled. UST – Terra USD fell more than 80 per cent on Wednesday as a result of the UST (Terra USD) algorithmic Stablecoin de-pegging debacle.
“The success of the Terra ecosystem depends on people using UST as a Stablecoin, so the LUNA token and UST are linked in a way that can’t be broken. When UST lost its dollar peg recently, it sent shockwaves through the crypto market, because it showed how weak the algorithm-backed Stablecoins are. UST fell to as low as $0.60 yesterday during the larger liquidations caused by the macro-market volatility. This caused a major sell-off in LUNA, which led to one of the biggest price drops in LUNA’s history and effects,” says Gaurav Mehta, founder, Catax, a crypto taxation firm.
In the last seven days, Bitcoin plunged 19.9 per cent, according to data from Coinmarketcap.com. Ethereum went down by 16.75 per cent during the same period, while BNB fell by 5.73 per cent.
In addition, the price of any asset depends on how much new investors want it. With signs of regulations in some form or another, along with the announcement of the central bank digital currency (CBDC), institutional investors are taking a wait-and-watch approach to find out what big changes will happen because of government announcements.
“Even though the retail investor interest and sentiment has continued to grow around the world, trade volume and investments have not picked up. This is because people seem to be preparing for a market crash that is visible around the world. So, they are more likely to invest in safe assets than in high-risk, high-return asset classes like crypto,” adds Mehta.
What Should Investors Do?
Crypto market experts have suggested to observe the market movements closely rather than jumping into impulsive buying activity.
“Do not go all in now. Instead, keep averaging your investments in blue-chip cryptocurrencies,” says Edul Patel, CEO and co-founder of Mudrex, a global algorithm-based crypto investment platform.