Why is the crypto market crashing? All you need to know

Cryptocurrency was being called the future of money. Last year the crypto market was seeing new heights and was gaining more legitimacy. 

But the recent crash, which wiped out more than USD 1 trillion worth of digital money in the last six months, has posed serious questions over investing in cryptocurrencies. 

In November 2021, Bitcoin and Ethereum, two of the most popular and supposedly stable cryptocurrencies, reached their all-time highs.

Bitcoin’s value on November 9 was USD 67,802.30 and Ethereum was at USD 4,800. Both these currencies have now lost more than half their worth, reported The Wall Street Journal.

We take a look at what led to the crypto market crash, what the experts say and what we can expect next.

THE CRASH

• In November, the value of the crypto market was USD 3 trillion, but now it is down to USD 1.28 trillion. Bitcoin, the world's largest cryptocurrency, fell as low as USD 25,401 on 12th May, its lowest since December 2020, reported Reuters. The current price of Bitcoin was USD 29,844.

• The digital currency Luna is now nearly worthless, and a related coin, TerraUSD, is also struggling. And Tether, a token known for its stable price, needed an urgent rescue last week, reported NBC News. 

• TerraUSD’s market value was down to USD 1.3 billion from nearly USD 19 billion earlier this year. TerraUSD had a huge meltdown last week, falling well below its USD 1 value. The collapse put pressure on the price of Bitcoin and other cryptocurrencies, and erased the value of TerraUSD’s sister token, called Luna, reported The Wall Street Journal. Luna is used as collateral against TerraUSD and is supposed to keep it pegged to USD 1.

• Other cryptocurrencies such as XRP have fallen by 34%, Solana is down by 38%, Cardano has tanked 35%, Stellar has fallen by 29% and Avalanche is down by 39% since January, reported the Mint.

WHAT LED TO THE CRYPTO CRASH?

• Rising inflation, interest rate hikes, and geopolitical instability could be partly to blame, Bank of America global crypto and digital asset strategist Alkesh Shah told Fortune magazine.

• One major reason for the current crash in the crypto market is the downfall of stablecoin TerraUSD. The TerraUSD crisis has rippled through the crypto industry and sent prices of almost all well-known coins down by a considerate amount, reported the Mint.

• "Now when the interest rates are high, there is a big pressure for selling. And that is what explains the crypto meltdown. So, it's a phenomenon of the perceived demand and supply for the crypto as a valuable asset," Subhash Chandra Garg, former Finance Secretary of India, told Business Today.

WHO OWNS CRYPTOCURRENCIES?

• Crypto trading is most common among men aged 18 to 29, of whom 43 per cent said they had invested in, traded or used a cryptocurrency, according to a Pew Research Center survey, reported NBC News.

• Coinbase, a cryptocurrency exchange, said institutional and retail investors each accounted for about 50% of the assets on its platform in the fourth quarter, reported Reuters. Its institutional clients traded USD 1.14 trillion in crypto in 2021, up from just USD 120 billion in 2020, Coinbase said.

• Most of the Bitcoin and Ethereum is held by a select few. A report from the National Bureau of Economic Research (NBER) showed that 10,000 Bitcoin investors control about one-third of the Bitcoin market, and 1,000 investors own approximately 3 million Bitcoin tokens.

WHAT'S NEXT?

• While some believe that the recent dip in the crypto market gives them an opportunity to buy at a lower price and book profit, many have lost faith in digital currencies especially with the downfall of some stablecoins.

• "People need to know that crypto is an extremely risky asset class. If someone is participating, they need to do it knowing that it can go to zero. That means they are allowed to allocate only a small portion of their capital, because the fundamental thing in investing is that higher the risk, the lower the allocation," Nithin Kamath, CEO and founder of crypto exchange Zerodha told moneycontrol.com.

• "I am looking to buy the dip. We are all waiting for Bitcoin to go down to USD 22,000, which is not something too probable but not something that's not probable at all," Eloisa Marchesoni, a Mexico-based crypto expert told Reuters.