What Caused The Crypto Crash?

When it comes to cryptocurrency, there is no doubt that there has been a large increase in its overall growth and popularity in recent years. That being said, it’s not as if crypto is a concept that has been welcomed with open arms; many sceptics out there continue to question exactly how much it could be relied upon, given a few individuals have a lot of control over its value, making the currency reasonably unstable and unpredictable. This unpredictability is probably best exemplified by the recent crash in crypto, as Bitcoin, the world’s most popular crypto, saw an 18-month low in 2021 and currently stands at around 60%. 

If you are interested in cryptocurrency or are interested in getting involved in crypto, then it may be that you are sitting there wondering exactly what it was that caused this crash. If that’s the case, look no further as in the article below; we will dive into more detail as to why this crash happened in the first place. 

Luna-Terra Crash 

One of the most significant factors was the pre-emptive crash in Luna-Terra. This was an event that had a detrimental impact not only on those who had invested in Luna-Terra but also on the crypto market as a whole. There were people who managed to lose their entire life savings as a result of the Luna-Terra crash. 

Thanks to the amount that was lost with Luna, Terraform Labs (the company responsible for Terra) decided to make a plan in which they would sell every single one of their Bitcoin reserves in order to bring their peg back to $1. They, unfortunately, failed to do this and what was even more unfortunate was that in their attempt, they managed to wipe $40 billion from the crypto market. 

The Equity Market 

There is a direct link between the crypto market and the equity market. If there is any kind of downtrend seen within the stock market then this will be replicated within the world of crypto. As such, when there is a real-world factor that affects the stock market, crypto runs parallel to that effect. 

This can be seen recently as stocks in the likes of Tesla, Apple and Amazon have dipped more than 6%. The same thing is happening within the world of cryptocurrency due to the direct link made between the two markets. 

Ideally, the crypto market should run independently and not be affected by the traditional stock market, although that is not yet the case. It can be demonstrated that the value of Bitcoin seems to move closely to the value of Nasdaq (which is a benchmark that leans towards technology stocks). 

A Rise in Interest Rates 

There has been an increase in inflation recently, and in an attempt to try and cool this down, the US Federal Reserve made the decision to slowly increase the rate of interest. There was a report published by the Wall Street Journal which stated that the Fed would most likely follow aggressively, increasing the price of debt, which could potentially lead to a record high inflation. When there is an aggressive rise in interest rates, people quite commonly view this as an indication that there could be a recession. 

After this was realised by a number of people, the stock market (and the crypto market with it, as per the above) saw a huge downfall. There were investors everywhere who began selling off digital assets, which led to chaos throughout the crypto market. 

Challenges Surrounding Regulation 

There is no getting away from the fact that so far, 2022 has not been an easy ride within the world of cryptocurrency. The entire market has been under strict scrutiny from governments all over the world as they continue to make attempts to regulate the use of cryptocurrencies. 

The crypto bill that is being proposed in India for example would essentially make it so that all private cryptocurrency throughout the entire country is banned. There has also been a 30% tax levied on crypto. The country is yet to strictly regulate crypto but is also far from properly legalising it too. This is just one of many countries who are looking to regulate and even ban the use of cryptocurrency. With so many countries taking a stand, it is clear why a lot of people who might have invested previously suddenly have become hesitant to do so. 

The Celsius Network 

If you are yet to hear of it, the Celsius Network has filed for Chapter 11 bankruptcy, reporting a decentralised finance which is being used as a means to freeze all of the crypto transactions, citing “extreme market conditions” as its reason. After the initial shutdown, there was a large sell-off, during which we witnessed crypto prices plummeting.

The company wrote a blog post about the decision made, stating that, “we are taking this necessary action… to stabilise liquidity and operations while we take steps to preserve and protect assets.” They went on to try and reassure customers as they confirmed, “customers will continue to accrue rewards during the pause in line with our commitment to our customers.” 

Despite the reassurances made, the damage was already done as crypto prices all took a big hit, and the value dropped as a result. 

What Will Happen with Crypto Moving Forward? 

The value of the cryptocurrency market has always had its up and downs and has always been surrounded by slight unpredictability. This was especially the case recently as the value of cryptocurrency managed to hit an all-time low following a large crash. There were a lot of factors that contributed towards this, some of which are a representation of the stock market as a whole rather than just the value of crypto individually. 

If you would like to stay up to date with what is likely to happen to the value of cryptocurrency moving forward, then it is a good idea to follow blogs that specifically focus on blockchain and cryptocurrency. YouYaa is an excellent blog that will help you stay up to date on everything within the crypto market.