Why Is the Crypto Market Crashing Right Now?

August 18, 2022

Not so long ago, in November 2021, the crypto market reached its peak. Since then, the situation has changed dramatically. The market has experienced a crash, which has caused bitcoin to trade 70% below its ATH, and the case for most altcoins looks even worse. Many experts believe that a bear market or a cryptocurrency winter has already begun. Strange, because as we can see, the bears have not yet fallen into their winter sleep. Firstly, summer is just beginning, and secondly, the market is still bleeding.

Admittedly, the market has been stagnant for several days. BTC is trying to get back above the $25,000 barrier, but without proper momentum – its price is oscillating in the range between $23,300 – $23,550 (as of August 18, 2022). So far, there are not many signs of a recovery and a change in the trend. Investor sentiment is very negative. The Fear and Greed Index has been at “extreme fear” levels for almost a month. So what caused the crypto crash? Why is crypto crashing right now?

Article contents

1 Why the Crypto Market Crashed?
2 Is Bitcoin Dead?

Why the Crypto Market Crashed?

There are quite a few possible reasons for the crypto crash. However, the main factors behind the declines are the current global economic conditions, the collapse of the Terra ecosystem and the problems of crypto lending platforms. Let’s look at all these issues a little closer: macroeconomic factors, Terra collapse and cascade of liquidation

Macroeconomic Factors

Many people invested in BTC crypto to hedge their savings against inflation. The primary cryptocurrency, known by many as “digital gold,” was supposed to protect against this phenomenon just like a physical precious metal. Proponents have pointed to its independence from the banking system.

Nevertheless, inflation in the U.S. reached its highest level in more than 40 years in June – 9.1% before slowing slightly to 8.7% in July. Such a year-on-year increase beat analysts’ expectations. Moreover, there is no assurance that this is the end of the hikes.

Soaring prices have raised fears that the Federal Reserve, the U.S. central bank, will continue to raise interest rates. And that’s what has happened. The Fed recently increased them to the highest level in 28 years – since 1994. This time they rose by three-quarters of a percentage point. Previously, they were raised by a quarter-point in March and half a point in May.

Higher interest rates generally discourage investors because they make borrowing more expensive.

How long will crypto winter last? Galaxy Digital (TSE: GLXY) head Mike Novogratz, for example, believes that bitcoin can only begin another rally once the Fed rethinks its moves. In a recent interview with CNBC, he said:

Bitcoin will lead the markets back out of this Fed hike…The moment the Fed flinches…Because the economy’s really starting to roll over…They are going to see bitcoin explode north. “Lots of guys I talk to are seeing the next time they’re going to get involved is when they start sensing the Fed’s going to pause.
Mike Novogratz

Terra’s Collapse

Another significant event that impacted the crypto crash was the collapse of the Terra ecosystem (stablecoin UST and its associated LUNA token).

Admittedly, TerraUSD turned out to be too small to damage the entire ecosystem permanently. However, UST has forever lost its peg to the US dollar, and LUNA has dropped almost to zero. Its supply has been hyperinflated because the network’s founders tried to salvage liquidity for their stablecoin. As a result, Luna Foundation Guard (LFG) used its reserves of 80,394 BTC to defend the peg. However, this had no effect.

Bloomberg suggested that if the destabilization had taken place a few months later, and stablecoin UST had been much higher as a result (as it has been growing rapidly since the beginning of the year), then the negative impact on the entire cryptocurrency ecosystem could have been far worse. The news agency even compared this potential event to the cryptocurrency version of the 2008 Lehman Brothers collapse.

With uncertainty in the stablecoins market and under the weight of $3.275 billion worth of BTC sold by LFG, at the end of June 2022, the primary cryptocurrency fell to its lowest level since December 2020.

Celsius and Three Arrows Capital (3AC) Problems

Another factor contributing to the crypto crash was the growing problems of cryptocurrency companies Clesius and Three Arrows Capital (3AC).

According to experts, these firms used risky investment strategies, placing their clients’ funds in high-interest DeFi protocols. Nevertheless, the crypto crash led to a situation where they started experiencing liquidity problems.

Initially, Celsius suspended withdrawals, swaps and transfers between user accounts. Why? Because most of its holdings were in synthetic assets – stETH and WBTC. When it came to light that their investments were at risk, investors began redeeming their positions massively – in amounts of 50,000 ETH per week.

At one point, the project’s native token – CEL – fell to $0.2. Since then, however, it has already risen by several hundred per cent. Indeed, Celsius took the problems to heart and began looking for a solution, hiring, for example, lawyers from Akin Gump Strauss Hauer & Feld for possible financial restructuring.

It has also reportedly turned to Citigroup for help. As far as we know, the financial conglomerate will only “advise the company on possible financing options.” However, it will not provide funds from its balance sheet.

On the other hand, three Arrows Capital (3AC) got into trouble because of the Terra ecosystem. A few months before its collapse, Do Kwon’s company, Luna Foundation Guard, had raised $1 billion from investors. As it turned out, 3AC also allocated funds to the project.

What’s more, in early June, 3AC began to make a lot of different, suspicious moves in DeFi protocols. Some crypto community members started speculating that the company might find itself in a similar situation to Celsius. As it turned out, they were right.

Soon after, 3AC was hit by a cascade of liquidations, problems with regulators, and eventually had to file for bankruptcy.

The crisis at 3AC affected the entire industry, as many large projects are linked to this hedge fund.

Why Is the Crypto Market Crashing Right Now?

Is Bitcoin Dead?

Amid the declines, the media has once again begun to write about the death of bitcoin. But, is this just another crash in the volatile cryptocurrency market, or is this the beginning of the end for this alternative asset class?

According to 99bitcoins data, BTC has been called “dead” at least 461 times since its launch. There have been 21 such cases in 2022 alone.

However, is this the end of bitcoin? Looking at the situation historically, it is not at all. Indeed, bitcoin has already experienced 50% declines (or more significant) at least six times in its career.

In fact, this is how every cycle in history has looked like. First, there was a halving, and then the bull market in Bitcoin began. Next, investors who realised profits started investing in altcoins triggering the so-called “Altcoin season.” After reaching ATH, there were sharp declines, mainly caused by panic among retail investors.

Now the situation is admittedly different. The market has seen the emergence of many institutional players, who collectively hold a massive percentage of the supply and are heavily leveraged. Nevertheless, two things point to the fact that bitcoin is here to stay – soaring adoption and the optimism of crypto enthusiasts.

Growing Adoption

The current situation of the cryptocurrency market is different from what it was a few years earlier – mainly in terms of adoption. Who would have thought of spending bitcoin directly or storing it in the wallets of payment giants before? During previous bull markets, huge corporations did not hold it on their balance sheets either.

In general, the adoption of cryptocurrencies is a phenomenon, so to speak, of the “absorption” of digital currencies into the economy or other spheres of everyday life. The stronger this process becomes, the more investors and ordinary consumers, for example, will know what bitcoin, blockchain or Ethereum is and how to use this type of technology.

Cryptocurrencies nowadays can be compared to websites in the 1990s. Back then, many people knew what websites were, except that it was not common knowledge. Today, every person, even older, knows what the Internet is. A similar fate may be awaiting cryptocurrencies. But how do we check the level of adoption? Where can you see it best?

Bitcoin ATMs

Analyzing the bitcoin ATM market is one way to study how cryptocurrency adoption develops. Bitcoin ATMs are devices that allow you to buy and sell bitcoin and often other coins. In appearance, they resemble traditional ATMs. The number of bitcoin ATMs is, of course, much lower than this traditional one. How many are installed around the world today?

According to Coinatmradar, a global register of BTC ATMs, today, we can find 38,599 such devices in 77 countries. Most of them are installed in the US (34,344), Canada (2,523), Spain (256), El Salvador (212), and Poland (191).

Large Companies and Even Countries Open to Cryptocurrencies

The scale of the success of bitcoin and cryptocurrencies so far can also be seen in the fact that more and more large companies are investing in digital assets and even adopting them as a means of payment.

One example is Tesla. This company has accepted bitcoin as a form of payment for its cars. In addition, it invested some of its capital in the market. Today, the company does not accept BTC for its products anymore, but Elon Musk, its CEO, has announced that it will resume doing so as soon as bitcoin will be mined through greener methods.

However, Tesla is not exhausting the subject. Other major players, such as MicroStrategy, are also investing in cryptocurrencies. The payments market giant PayPal offers its customers digital assets as well. The fact that “big fishes” are allocating their funds into cryptocurrencies means that digital assets are becoming more and more reliable in the eyes of investors.

However, it doesn’t stop there. Even entire nations are beginning to recognize BTC as legal tender. El Salvador, for example, did so in September 2021, and the Central African Republic recently joined the trend a couple of months ago.

Chainalysis Report

We can also find interesting data on adoption in a recent report by Chainalysis. According to it, global adoption has increased by 880% over the past year. The reason? Trading activity using cryptocurrencies and the increasing treatment of bitcoin as a store of value that helps preserve value in times of high inflation.

Interestingly, according to the Global Crypto Adoption Index, the highest cryptocurrency adoption rate can be seen in countries such as Vietnam, India and Pakistan. These are developing countries. In India, the authorities are outright hostile to digital currencies, but citizens are still keen on BTC despite this.

Investors from emerging markets are investing in BTC because it allows people who don’t have a bank account to make transfers.

Optimism Among Crypto Enthusiasts and Companies

And although there is general anxiety in the market, cryptocurrency supporters and enthusiasts still see a bright future for the asset. “The street” has admittedly panicked, but for people thinking about this asset class in the long term, this is a “buy the dip” opportunity.

Persistent HODLers will always find positive signals in on-chain data or technical analysis. On the other hand, they often look for signs that confirm their beliefs.

In contrast, others believe in market cycles. Although cryptocurrencies are often compared to the dot-com crash in 2000, enthusiasts argue that the basic premise of dot-com stocks was correct. The Internet has become the future, and they believe it is also valid for bitcoin.

Cryptocurrency companies seem to have a similar view. For example, CMO of the StealthEX exchange Maria Carola is optimistic about the future of the industry, saying:

It’s perfectly natural to feel anxious when the market is down – we all feel this way. However, people who have been in crypto for quite a while have seen all of this before. We were there when Bitcoin was trading at 3500 in 2019, and it seemed to be the end of the world at the time. Just look at the whole picture, at the older data. What I’m saying might sound quite maxi, but it’s true – we did not have whole governments diving into crypto, nor this scale of mass adoption.
Market fluctuation will happen again, many projects will destabilize and die out, but this has to happen. What we can do is hold tight and continue working like before. Despite the conditions, many users want to swap. Besides, quite some people are into the opportunity of buying the dip – as a platform that has the fiat purchasing functionality, we’re the first to witness the trend.
To sum this up, #WAGMI. We’re really not in bad conditions if the adoption increases 80%.
Maria Carola

Admittedly, some companies are laying off employees. However, this is mainly due to a lack of cash reserves. For example, Binance, which has sufficient funds in reserves, has decided to use the crypto crash to hire additional staff and grow the business.

Digital assets also face challenges in terms of energy use, according to some. However, as studies show, bitcoin, specifically its mining sector, has pushed humanity towards obtaining it from renewable sources.

The crypto market remains a volatile field that continues to follow its own rules and trends, making cryptocurrencies a risky and often unpredictable investment. However, as the hype around cryptocurrencies is dying down, this may present crypto enthusiasts with yet another opportunity for crypto buys. StealthEX is here to assist you in buying over 450 digital assets at modest prices. You can do this privately and without the need to sign up for the service.