Cryptocurrencies did not have a good start from the beginning of the year. The three major cryptocurrencies, namely Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB), in the crypto market all lost value. Bitcoin (BTC) went down by 40%, while Ethereum and Binance Coin (BNB) decreased by 48%. Crypto crash is believed to have more impact today because of the many people and institutions that can access these volatile crypto assets. It's also thought to be a result of a mixture of reasons, including the emergence of larger financial markets, shying off from investing in risky assets, inflation, increased interest rates, and the uncertainty of the economy caused by the invasion of Russia to Ukraine.
You can access this article to learn the key points when investing in cryptocurrencies. Read on to understand the reasons for a crypto crash in 2022:
1. Volatile Nature
The crypto business is volatile because success is not guaranteed. The market falls when there's no actual cash flow, whether the prices go down because of big investors' selling off of shares or other reasons. Volatility is also a result of the number of people investing in crypto varies with the time they opt to do so. For instance, over 50% of the investors in crypto by the end of 2021 are those who joined the market that same year. This variety in the time to invest affected the status of cryptocurrency, causing it to crash in 2022.
2. Cryptocurrency Markets Have No Liquidity
There's no liquidity because most of the time, there's a massive number of coins to be sold, and there are few investors ready to buy. To better illustrate this, when an investor with a large share of a particular asset sells a significant amount of crypto, it's possible that the market will be flooded but will have less demand.
3. Regulation Impact and Security Breaches
Most countries keen on crypto trading and mining, like the U.S, Germany, China, and India, observe some regulations through their governments. It is, to some extent, a threat to crypto investors because they may not have the liberty to invest as much as they want.
The issue of security breaches and hacks has also proved to be a crypto challenge. Reports say that USD$600 of Ethereum sidechain ronin was hacked. Such happenings affect consumers' confidence, leading to the slow growth of potential buyers.
4. Association Of Cryptocurrency With The Stock Market
Ideally, cryptocurrencies should float freely without being correlated to other assets. But this year, crypto has become more linked to the stock markets since its adoption in the past years. Crypto is similar to the stock market concerning interest rates and inflation when it should be guarding against them.
5. The Terra Effect
Terra, one of the most significant stable coins valued at more than 50 billion dollars, at one point collapsed, leading to the collapse of other cryptocurrencies like bitcoin. The crypto market is somehow not proportional in that investors partly gamble outrightly and participate in day-trading. The increase in costs will push investors into selling some of their shares, which continues to cripple the sector.
6. Withdrawal Of Stimulus Measures by the U.S Reserve
One of the stimulus measures withdrawn is the maintenance of low-interest rates. The rates have been increased to curb inflation, but there's reduced cash flow. This withdrawal affected crypto in a way that investors sold off most of their shares. Investors have also considered spending their money to buy less risky stocks.
7. Investors Taking Too Much Advantage On Crypto
At the beginning of the year, the number of investors taking the risk on crypto increased. The investors opted to finance future purchases using debt – a tactic to shield against the drop in coin prices. In the event of the decline, investors' next move would be to pay off their positions, a situation that would accelerate the fall of prices further, resulting in the crypto crash.
8. The New Covid-19 Variant
The new Covid-19 variant, Omicron, has played a part in the crash of crypto. Investors' interest in the market has decreased following travel restrictions and lockdowns, among other measures to guard against infection by Omicron. They're selling off their assets and spending less. In other places, the effect of Omicron has impacted the supply chain so much that the cost of manufacturing has increased significantly.
The Crypto crash has generally affected investors and the economy in a big way; however, there are lessons to be learned to guard against similar effects when there is another crash. The crash will remain temporary if such adverse effects, including high inflation, huge debts, and lack of employment, can be managed.