Crypto is in free fall. The market in aggregate has lost nearly $1.4 trillion in capitalization since its downfall began in November last year. Of the trillion that vanished, Bitcoin accounted for almost $600 billion.
In November, Bitcoin, the world’s most valuable but infamous currency, reached a record high of $68,990. On Monday, it was trading below $34,000. In mere months, its value had halved. Other cryptocurrencies were not spared either. Ethereum crashed nearly 30%, while Shiba Inu—”meme token” Dogecoin’s alternative—plummeted by 78%.
Since Sunday itself, the crazy selling has wiped over $130 billion from the market. That is quite the hammering. The question is, what is fueling the chaos? The question is quite frankly impossible to answer with certainty. The complexity of global markets today is beyond comprehension. Still, experts have offered some theories that could explain the selling spree. Here are two that stand out.
Why cryptocurrency prices are falling
Undoubtedly, the massive blow to the global cryptocurrency market comes down to a complex interplay of many factors. But the two reasons have been cited most commonly by analysts worldwide.
1. US inflation measures impact cryptocurrency prices
US inflation reached record heights last year. According to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics in October, year-over-year inflation had climbed by over 6%—the highest in three decades. Despite reassurances, the price surge got only worse, reaching year-over-year 6.8% by November—the worst in four decades!
The price rise was evident in necessities. The cost of gasoline, for example, had reportedly risen by 58% over the disruptive year. Food cost 3.3% more—the highest y-o-y rise since January 2009. The shelter component of the CPI rose by nearly 4% y-o-y—the biggest spike since June 2007.
Read more: “Most Since 2009”: How US Inflation Rose Fastest in 30 Years
To combat the inflation, which is estimated to have begun in April, Congress passed Biden’s $1 trillion infrastructure bill into law. Such an injection earlier is believed to have caused the inflation in the first place. For many, the lockdown led to an increase in savings. Combine that with the stimulus package and nearly nil interest rates, and you have people with excess cash willing to pay higher and higher for goods.
But while many buy and consume more, others invest. And, certainly, many did in cryptocurrencies. Except that this time, the Fed is injecting money but also increasing interest rates. In fact, as of writing this sentence, the Federal Open Market Committee (FOMC) will be held in some time, where new rates could be determined. (Many suggest that the Fed will increase the rates in increments, from 0.25% to 1% by the end of 2022.)
What has that got to do with cryptocurrency prices? According to analysts, the expected rise is causing investors to dump risky assets—cryptocurrencies just happen to be one of them. Let us not forget the regulatory uncertainty surrounding cryptocurrencies. More on that later.
Read more: What Will the Economy Look Like in 2022? 6 Trends to Watch Out For!
The downfall of Bitcoin, Ethereum, and co. has once again shown that despite many suggesting otherwise, cryptocurrency prices seem to be linked with stock prices. Perhaps it is the Fed ending the stimulus program earlier than expected, but the stock market since the year’s beginning has also been abysmal. Analysts also cite the fact that instead of investing in traditional stocks, investors invested the extra cash in the crypto market, delivering quite the blow to the US stock market.
All in all, expected inflation measures seem to be one of the two biggest reasons for the sharp decline in cryptocurrency prices.
2. Russia’s blanket ban on mining and trading crypto
Either you are for cryptocurrencies, or you are against them. The absolute views are especially apparent on social media. One faction, which includes the likes of Elon Musk, hypes coins. Whereas the other faction, which includes Michael Burry of The Big Short fame, strongly opposes them. Cryptocurrencies are either the future of money or just another Ponzi scheme.
Both seem to have valid points. Blockchain, the underlying technology, ensures that every single transaction is accounted for in a digital ledger. Let us not forget that the system is decentralized. Every transaction is independent of regulations imposed by financial institutions.
Read more: Could ‘Stablecoin’ Save the Future of Digital Currency?
However, mining and trading cryptocurrencies are outrageously energy-intensive. On a global scale, the electricity spent on mining and trading cryptocurrencies is comparable to amounts used by entire nations. Unless their mining becomes energy-efficient, cryptocurrencies pose a massive threat to our countermeasures against climate change.
Secondly, since cryptocurrencies are independent, they represent the go-to for ransom or funding other criminal or illegal activities. And then there is the third, most evident problem. Cryptocurrencies are highly volatile for a store of value, compared to, say, the US dollar. As explained, Bitcoin’s value halved in mere months. In fact, this is the eighth—yes, eighth—time the coin has dropped 50% since its launch in 2009. And since cryptocurrency prices are linked with stock prices, when they fall, they usually tend to take the market with them.
The last two reasons are enough for governments to intervene and perhaps regulate the cryptocurrency market. However, some have taken to outright banning them. First, it was China. Then, it was Russia. China’s exit last year sent shockwaves across the market, wiping off several hundred billion dollars in market cap. And so has perhaps Russia’s exit, being a major player.
But that is crypto for you.
On the one hand, El Salvador has accepted Bitcoin as legal tender. The president, Nayib Bukele, indeed “bought the dip,” as investors say, as he purchased 410 more coins since the market crashed. Even New York’s mayor is optimistic, claiming to buy low and hoping to get the recovery.
On the other hand, nations like Russia have banned its trade, calling it a pyramid scheme and a threat to the financial sovereignty of Russia.
Read more: “US Reports Over 1 Million New Daily Cases”: Omicron vs. Delta, Everything You Need to Know
In February, Biden and co. are expected to outline the government’s strategy on cryptocurrencies. Stay tuned for updates.
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