Reasons Why Crypto Is Falling This Year

2022 has been a bit tough year for the whole of the crypto market due to various reasons

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Most financial markets pass through cycles. The crypto market saw a massive rally post quantitative easing by the US Federal Reserve. This rally replaced the consolidation observed at the height of the coronavirus pandemic in March 2020. We saw markets rising to new heights. Bitcoin created its recent all-time high, reaching over $68,000 in November 2021.

Edul Patel, CEO & co-founder, Mudrex

However, the crypto market has been on a downward spiral since the start of this year. Bitcoin has lost almost two-thirds of its market value when we benchmark the price of BTC from its all-time high in November 2021 to the current date. Not only BTC, most cryptocurrencies, along with Ethereum, have dipped to a great extent touching the ground at their lowest until now. 2022 has been a bit tough year for the whole of the crypto market due to various reasons. Here are the most prominent ones which led to the market dip.

Uncertainty over COVID-19

Even though Bitcoin had been largely range-bound since December 2021, it slumped from $47,000 to $43,000 due to the uncertainty over the new COVID-19 variant, Omicron. Since the beginning of January 2022, people began to fear the increasing spread of viruses across the globe and held themselves back from investing in crypto.

The war between Russia and Ukraine

Cryptocurrencies again crashed in February as Russia announced the war against Ukraine, which resulted in the crypto investor community initiating massive sell-offs to protect their portfolios against further price drops. The Ukraine-Russia crisis has halted the rally the crypto market recorded over the previous year.

Hike in interest rates

Along with the Russia-Ukraine conflict, the announcement of the US Federal Reserve hiking the interest rates in February has pressured the market participants even more. The Fed approved a nearly 0.25 per cent point rate hike, the first increase since December 2018, to counter inflation created by the pandemic and war crises. Even though there were gains during the Chinese New Year, they lasted for a short period.

Regulatory ambiguity

Meanwhile, in India, many crypto investors started to sell off their crypto holdings after the government announced higher tax rates on crypto gains during the budget session in March. The government has announced a 30 per cent tax on virtual digital assets, which won't be offset for losses, and 1 per cent TDS on crypto assets.

Collapse of Terra

Even though the crypto market has been consolidating since early April, it started falling in mid-May after the algorithmic stablecoin, Terra, collapsed, losing its peg with the US dollar. The price of LUNA began to fall due to short selling, creating a kind of panic among the crypto holders as most of them lost their money. The event added to the market crisis taking Bitcoin to its all-time lowest. After the stablecoin, TerraUSD, lost its peg with the US dollar, cascading liquidations emerged. The Terra Foundation Group lost a whopping $50 billion!

Although this seems massive, this was just the beginning. It was followed by the liquidation of the crypto lending platform, Celsius, and the Singapore-based hedge-fund, Three Arrows Capital. These events deeply impacted the entire cryptocurrency market valuations. And all of these happened in a very short span.

Downward trend in equity market

The crypto market has a high correlation with the equity markets. If a downtrend is witnessed in the stock market, it impacts crypto too. In late 2021 and mid-2022, crypto prices rose and fell in line with the equity prices. With tech stocks dipping, thereby impacting the NASDAQ and stock indices globally, cryptos such as Bitcoin, Ethereum and Dogecoin were affected.

Inflation and breakdowns

Bitcoin has reached its 18-month low after US inflation reached a 40-year high. Most cryptocurrencies which struggled amid the Fed's policy in recent months have been hit predominantly. And with the collapse of the Terra/Luna ecosystem, companies like Celsius and Three Arrows Capital witnessed troublesome events. Soon after, Singapore-registered crypto exchange company, Vauld, paused the withdrawals. This series of events has created a panic among the market participants.

Series of events led to early crypto winter

With a series of events impacting the crypto market since the start of the year, the negative sentiment across the cryptos increased, leading to a prolonged bear market or crypto winter. Even though the fluctuation is not as significant as mid-May's, the market is still running low and might take some time to recover and bounce back, making sharp moves.

However, the market will arguably recover and bounce back stronger. All extended consolidations after a bear phase is a good sign for the market. It allows the market to recover and the bulls to get stronger. A bear market removes the bad actors, leaving only the true believers.

Although this crypto winter could likely be prolonged, it would arguably emerge stronger.

In the words of P.B. Shelley, "When winter comes, can spring be far behind?"