The world’s been taken by storm with the latest news of an insane crypto crash that’s shaken even long-term investors. It seems like cryptocurrencies have been diving to a new low every day, with some of the largest cryptocurrencies, Bitcoin and Ethereum, losing anywhere between 50% and 85% this year. The overall crypto market has shrunk from $3 trillion to $983.72 billion according to CoinMarketCap with most major currencies trading in the red.
Here are some of the reasons that set off the great crypto-market crash.
The Rise in Interest Rates
This was, however, not the only reason that led to the crypto crash. In order to reduce inflation, the US Federal Reserve chose to hike interest rates (by up to 75 basis points on 15th June 2022). The aggressive rise of interest rates is usually seen as an indicator of economic recession, and both the equity markets and the crypto markets saw a huge downfall because of this. Investors have started to lose trust and have begun selling off their crypto assets as well, leading to the cryptocurrency massacre.
One of the first events that triggered the wider crash was when a stablecoin, Terra (also known as UST), broke its peg to the US dollar. Terra is a blockchain for itself, like Bitcoin and its major product is UST. Most crypto traders use stablecoins as safe havens for when the DeFi markets become more volatile instead of converting their assets into cash. Most stablecoins derive their value from reserves, and would ideally have enough cash to pay everyone if all traders opt out at once. However, UST is one of the algorithmic stablecoins that’s based on code and is theoretically linked to Terra’s base currency, Luna.
According to some experts, when big investors chose to borrow huge amounts of bitcoin to finance their UST purchases so they could profit from short-selling, the UST broke its peg to the dollar. This led to a bank run with investors all trying to get out and resulted in the fall of the Luna as well. Backers of the coin tried to save it but to no avail. Terra ended up dragging down Bitcoin and the rest of the market too.
The Stock Market
Since late 2021, and until now, the crypto market has been following very similar trends to that of the stock market, many of the same factors affect both markets. Lots of major tech stocks such as Apple (AAPL), Tesla (TSLA) and Amazon (AMZN) have seen big dips in recent times as well. The New York Times mentioned that Bitcoin’s price movements were found to mirror those of NASDAQ rather closely*. Although crypto markets function independently of traditional financial markets, there is still a correlation of sorts between their performances.
The stETH De-peg
stETH is a derivative token representing staked Ether in Lido, it represents the combined value of the initial deposit and staking rewards. Through liquid staking (using Lido Finance), investors sought to support the Ethereum 2.0 Beacon Chain and receive stETH to participate in trading, lending, liquidity pools etc. However, when the value of stETH fell to 0.94 ETH due to a delay in the launch of Ethereum 2.0 and the lack of arbitrage opportunity to help it recover, we might see another situation that’s similar to the one faced by Luna-Terra even before investors can completely recover from it. Although the stETH de-peg didn’t result in effects that were as bad as the Terra crash, sentiments towards DeFi as a whole were negatively affected and the prices of other altcoins like ETH have fallen.
Celsius Liquidity Crunch
Another effect of this is that a major DeFi platform and crypto lender (that also held lots of stETH) announced that it would freeze all cryptocurrency transactions citing “extreme market conditions”. The firm has not specified when it will resume transactions and currently fears insolvency, sending investors into further panic. This led to a 58% fall in CEL, the platform’s native token. The overall value of Celsius Network dropped below $1 trillion for the first time since January 2021.
All in all, crypto markets have entered free fall with no end in sight and repercussions of the crypto crash have been felt even by long-term investors. 2022 has been one of the worst years for cryptocurrency and we have entered a bear market overall. However, for those looking to invest, this is a good time to get in since most cryptocurrencies have dropped far from their peaks. There is still a chance for things to start looking up as the fundamentals of Bitcoin and such are strong as they seem. To find out more about which coins have been gaining the most hype, check out HypeIndex for more information.
*New York Times article about the correlation between Bitcoin and NASDAQ