The Crypto Crash: Why is Bitcoin Dropping?

The cryptocurrency industry has plummeted this year, erasing about $1 trillion from its market cap.

All the digital tokens are way down, from premier coins like Bitcoin to meme coins like Shiba Inu. It has been challenging to find refuge anywhere in the crypto ecosystem outside of a handful of virtual currencies, such as Tron and PAXGold.

Of course, Bitcoin’s collapse has been the real mainstream story, plunging about 38 percent year-to-date to below $30,000. After peaking at around $67,000 in November, the largest coin in the cryptocurrency sector has been decimated, and it is unclear when it will be revived.

The chief question among investors, be it institutional outfits or armchair traders, is why the peer-to-peer decentralized digital currency crashed. Well, there are many reasons to explain the selloff in 2022.

Here are five reasons why Bitcoin has dropped significantly this year:

1. The Tech Selloff

The tech-heavy Nasdaq Composite Index is in a bear market, slumping more than 25 percent year-to-date.

What does this have to do with Bitcoin?

For one thing, Bitcoin and other cryptocurrencies are more likely to emulate the performances of tech stocks than commodities or even inflation hedges. So, now that growth stocks are crumbling amid central bank tightening efforts (see below), cryptos will follow suit, and investors will take their profits and sell.

2. The Federal Reserve

The Federal Reserve is on a campaign to fight inflation while also achieving a “softish landing” of supporting economic growth.  

As a result, the U.S. central bank is aggressively raising interest rates, making borrowing more expensive and debt-servicing payments enormous.  

This matters for two reasons. The first is that higher rates will reduce the amount of easy money that floats throughout the economy. Second, many investors speculated on crypto by trading on the margin and using immense leverage.

With the Federal Reserve unlikely to hit the pause button on quantitative tightening or even pull a reversal for at least another year, traders will be apprehensive about placing their bets on volatile assets.

3. Liquidations and Leverage

Unfortunately, traders relied too much on leverage when parking their money in Bitcoin and the overall crypto landscape. In fact, recent data highlighted that the Bitcoin leverage ratio touched a record high in January.Put simply; investors have been liquidating their holdings after utilizing leverage to finance purchases of crypto futures. When the situation metastasizes into one whereby the broader crypto market does not possess enough liquidity, they need to panic sell to keep their accounts intact.

4. Cryptocurrency Regulation

When China officially banned cryptocurrency mining in June 2021, prices crumbled. They quickly recovered, but it spotlighted how much Bitcoin prices could fall when a major economy places restrictions or erects prohibitions on a segment of this global industry.

According to industry observers, another phenomenon occurred whenBeijing banned crypto mining: Hash rates declined. This is when the number of calculations performed per second decreases, meaning fewer coins are mined.

Put simply, when prices fall, the hash rate also tumbles.

5. Elon Musk

Yes, billionaire Elon Musk played a critical role in last year’s crypto bull market. Not only did he announce holdings in Bitcoin and other virtual currencies, but Musk also confirmed that Tesla Motors would acceptBitcoin payments. This led to a substantial rally, but his involvement also led to a sharp selloff because Tesla temporarily suspended Bitcoin payments.

Influencers can contribute to volatility, especially when these individuals have a notable presence in the market and go on Saturday Night Live to tell millions of people that Dogecoin is going “to the moon!”

What’s Next?

Believe it or not, Bitcoin slipping into a bear market and mirroring the losses of the broader equities arena can be a good thing for the crypto market.

Why?

For one thing, as Bitcoin matures and becomes widely adopted on MainStreet and Wall Street, the digital currency will follow the price movements of conventional assets. What triggers a stock selloff will also lead to a drop inBitcoin prices.

Indeed, if there is one trend that has been critical to the survival of crypto is the maturity factor.

Besides, many within the industry are ebullient over this selloff. BertrandPerez, CEO of the Web3 Foundation, told CNBC: “We’re in a bear market. And I think that’s good. It’s good because it’s going to clear the people who were there for the bad reasons.”

So, what’s next for crypto?

Now that much of the damage has been done, industry experts are looking at a few more scenarios unfolding.

The first is the collapse of thousands of cryptos. With nearly 20,000digital currencies and dozens of blockchain platforms, many of these tokens become redundant and will lose capital.

The second is the downfall of stable coins, particularly those that are backed by algorithms rather than genuine assets. The best example of this has been terraUSD, which lost its peg and plunged after its algorithm failed and could not fall back on traditional reserves.

The third is that many of the whales want more regulation. They desire more rules and greater clarity from some of the top central banks in the world to advance their investments or exchange-traded funds (ETFs).

Bitcoin Will Come Out Stronger

Bitcoin, and the other legitimate tokens that serve a utility, will come out of this bear market with a strong appetite for gains. The smart money will have taken over, investors with long-term goals for the industry will have a greater say in the market, and much of the pain will be priced in. Who knows if the bottom has occurred? Whatever the case, the future is bright for Bitcoin now that the industry has endured the growing pains of sell-offs and downturns.

 

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