Cryptocurrency prices are sensitive to macroeconomic factors and can affect investors’ confidence in risky alternatives. For instance, rising interest rates may make savings accounts more attractive than cryptos, causing many investors to move their cash to safer investments.
Additionally, falling prices can cause investors to unload their cryptos and free up cash in other ways. These factors can compound the pressure on the market and cause crypto to crash.
Bitcoin Price Collapsed
After soaring last year, Bitcoin’s price fell precipitously, with Coinbase tanking in value and nearly $300 billion in market value being erased by the crash. Its sudden drop has underscored the risks of investing in unregulated digital currencies.
Although tech moguls and celebrities have touted the benefits of crypto, the accelerated decline of virtual currency underscores that these assets can be worthless overnight. For the first time since December 2020, bitcoin fell below the $21,000 threshold on Monday night.
However, it made a small recovery on Tuesday and is now close to $22,000, up 9% from Monday’s low as indicated by OKX. Despite the recent rally, bitcoin is still down 70% from its all-time high of $69,000 last November.
Meanwhile, the cryptocurrency market capitalization is now below $1 trillion, down from over $3 trillion in November.
TerraUSD Plummeted
As the cryptocurrency market plunges, investors and traders alike are worried about the future of the stablecoin. A large cash infusion from TerraUSD’s backers and a timely halt in trading on one of the largest cryptocurrency exchanges saved the stablecoin from a bank-run-style death spiral. But the collapse was not without consequences.
The crash also exposed the centralized pressure points in the ecosystem. It also revealed that Terra’s boosters were trying to hide behind jargon. While a significant investor in the company, Novogratz had gotten a Luna shoulder tattoo in January. However, he has yet to tweet since May 8.
Traders have cited several reasons for the plunge. The price of the UST fell to $0.45 – a 55 percent drop. The decline has caused negative sentiment for Terra’s other cryptocurrency, LUNA. The fall in UST is primarily a result of the launch of a new enterprise on Metaverse by SAP, aimed at increasing cloud adoption in India.
SAP’s new enterprise will allow users to experience immersive and interactive experiences. The market cap of Terra has dipped below $2 billion from about $25 billion in its golden days.
Limited Supply
Investing in cryptocurrencies is risky, and several factors can contribute to crypto crashes. One of the most critical factors is a limited supply. Because the network will only mint 21 million bitcoin tokens, the value of bitcoin is unlikely to grow indefinitely. As a result, cryptocurrencies may not recover from their current crashes.
Another critical factor is security. If a security flaw appears in the network or blockchain, it could trigger a crypto crash. Similar to how a regulated actor would disrupt the stock market, a security flaw in Bitcoin would lower the overall price and affect miners’ desires.
Limited Appeal
Cryptocurrencies are still relatively robust, but their appeal is limited in some situations. For example, countries that impose capital controls may need help to regulate crypto-related activities, such as activism.
Nations without extradition agreements may also find it challenging to regulate ransomware vendors who extort payments from schools, hospitals, or other institutions.
Pandemic-Era Effect
Cryptocurrency prices are often correlated with traditional financial markets during times of crisis. However, when a pandemic strikes, the value of cryptocurrencies may drop sharply. The chaos caused by the pandemic could cause individuals to engage in hazardous activities.
This can also be a catalyst for sophisticated investors to manipulate market prices by artificially driving demand to lure unsophisticated investors. Once the price is high enough, they may sell off their holdings, taking advantage of herding behavior.
Cryptocurrency prices have remained high even though they’re fundamentally unsound long-term investments. The promise of ‘getting rich quick’ has blinded many participants to the economic reality. As a result, policymakers must determine whether crypto poses a threat to financial stability.
However, it’s important to note that the level of institutional crypto investment has been exaggerated. Moreover, it is unlikely that systemically important banks will be directly affected by a crypto crash.
Ella Marcotte
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