Widespread crypto market collapse have driven the price of Bitcoin below $27,000, wiping out another prominent altcoin, Luna, in a move that appeared unthinkable just a year ago.
BTC/USD has fallen more than 55 percent from its all-time high, which was set in November 2021. What does this mean for investors, though? Is there any hope for a comeback?
The crypto market collapse has impacted coins in similar ways, as shown in the charts above, but what’s causing the downturn?
Fundamentally, investor perceptions of cryptocurrencies have shifted as a result of the slump. Investors have been increasingly wary of high-risk investments as inflation rates have risen, and the crypto market’s volatility makes it an ever-present risk to portfolios.
According to Manturov,
“If we compare the situation from summer 2021 – when Bitcoin grew on inflation expectations and was to some extent a temporary digital alternative to gold – and the current situation, one important difference is worth highlighting. On the 15th of March, the Fed started the process of raising rates and ending QE.
“This has been the fundamental reason for all Bitcoin and cryptocurrency growth in the last two years. And with higher rates, an asset class like cryptocurrency may be less attractive.”
In addition to the recent crypto market collapse, formerly solid ventures like Luna have lost 99 percent of their market value, plunging from $6.75 to barely two cents, wiping out numerous investors’ accounts.
The asset’s relationship to TerraUSD (UST), a stablecoin pegged to the dollar, triggered the crash in the instance of Luna. The price of Luna plummeted as UST decoupled from the dollar in the run-up to the crash.
Luna’s market cap dropped from $40 billion to about $200 million as a result.
Although Luna’s demise was caused by a problem that had no bearing on the larger market, it’s logical to assume that the cryptocurrency’s precipitous decline influenced recent market sell-offs.
Bitcoin’s failure to break free from the crypto market collapse
Another factor contributing to the crypto market’s difficulties is its inability to distinguish itself from traditional stock markets. This might be frustrating for crypto fans who assume that because coins are built on the blockchain, they should be decentralised and hence immune to global market fluctuations.
Cryptocurrencies have been found to be inextricably related to the stock market in recent years. In March 2020, when the Covid-19 outbreak led global markets to plummet, Bitcoin also dropped 57 percent. Similarly, when markets recovered and experienced a huge gain, Bitcoin did as well.
The prognosis for crypto has dimmed as the optimism around the stock market’s comeback fades. As the Federal Reserve and other central banks have raised interest rates in response to rising inflation, investors have shied away from crypto, preferring to avoid the notoriously volatile ecosystem when it comes to wealth preservation.
Bitcoin’s current decline follows the Dow and Nasdaq’s greatest daily dips since the collapse of 2020. The disconcerting news of Russia’s invasion of Ukraine has compounded inflation concerns, resulting in increased inflation, supply chain challenges, and skyrocketing oil costs.
This has been exacerbated by the reemergence of Covid-19 in China, which has sparked financial concerns throughout Asia. While crypto enthusiasts hope that Bitcoin will eventually detach from the stock market, there’s no denying that the two are currently inextricably intertwined.
Is it time for a crypto winter?
The most recent drop in the cryptocurrency market has been especially difficult for investors to deal with, with speculation rising that the market is entering a new ‘crypto winter.’
Crypto winters are widespread and normally occur in the four-year period between Bitcoin halving cycles, the most recent of which will take place in May 2020. Between 2018 to mid-2020, the most recent crypto winter happened.
Although the term has negative connotations, a crypto winter is simply a period of hibernation for many cryptocurrencies, during which values remain stable and there are few bull runs to enjoy.
Crypto winters, however, do not have to be a bad thing, and they can potentially help to build the cryptocurrency ecosystem. Long periods of stagnation, for example, assist to shake out the less stable, sustainable, and efficient crypto projects over time, leaving only the most stable, sustainable, and efficient currencies, blockchains, and decentralised finance initiatives for investors to buy into when the bull market returns.
Although the crypto winter suggests that Bitcoin’s value will struggle to build momentum for price increases for a long time, there’s no reason to believe that BTC will never recover to its previous highs. The continued embrace of cryptocurrencies by institutions indicates that the cryptocurrency market’s future is bright.