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Top 4 Reasons the Cryptocurrency Market Is Crashing

What's behind the major downturn in the cryptocurrency market? Let's take a closer look.

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If I were putting it mildly — that is, euphemistically — I would say that cryptocurrencies are off to a topsy-turvy first five months of 2022. As of May 31, Bitcoin was down by over 50% from its all-time high in November 2021 (sinking from over $68,000 to around $32,000). The top cryptocurrency's chief rival, Ethereum, has faced a similar crucible over the past few months, having shed close to 60% of its value since it leapt to nearly $4,900 a coin last fall. And while other, smaller alt-coins have suffered similarly staggering losses, even the allegedly reliable stablecoins have been rocked by previously-unknown levels of inconstancy.

Even for an asset class long recognized for its unique volatility, the past few months have been painfully choppy. One of the most obvious questions jumping to mind for many investors who'd previously enjoyed stunning success with cryptocurrencies is why the market is crashing so precipitously now. Are these halvings in value just an expected function of a fledgling group of currencies with a skittish collection of backers — or are there more concrete, external factors that we should also be considering here?

The short answer, I believe, is the latter. These are singularly precarious times for the U.S. economy, the stock market and international geopolitics. On top of that, we are currently exiting a pandemic era that saw individuals who couldn't spend money on typical recreational pursuits instead invest — in some cases heavily — in everything from cryptocurrencies to NFTs to collectible trading cards. Some media outlets are calling it the "perfect storm" of factors leading to the sudden, steep decline in the cryptocurrency market. Even if that's a slight exaggeration of what's going on at the moment, there's no denying a powerful convergence of headwinds is having a deleterious effect on the nascent cryptocurrency economy. Here's a closer look at some of those headwinds.

Related: Bitcoin's Crypto Crash Prompted This Firm to Pause Withdrawals. Here's Why

1. The specter of inflation

Part of the appeal of cryptocurrencies was that they were supposed to be insulated from the vagaries of inflation. While the value of the dollar suffered during periods of an overheated economy, many expected cryptocurrencies to remain steadfast. In this way, people saw cryptocurrencies operating in the mode of classic, longstanding inflation hedges like gold. Unfortunately, major cryptos like Bitcoin and Ethereum have not functioned successfully in this capacity over the past six months, as inflation has continued to climb and their value has not held steady.

Part of the reason for this failure of cryptocurrencies to live up to expectations as an inflation hedge may have to do with just how severe this period of economic overheating has become. As of March 2022, the inflation rate of 8.5% was the highest in over four decades. A month later, in April, it had slowed only fractionally to 8.3%. With the cost of everything from cars and gasoline to groceries and plane tickets soaring, people might actually be pulling their money out of non-essential investments — which, for many, cryptocurrencies qualify as.

Related: The Crypto Market Crash

2. The end of the pandemic-era effect

The period from March 2020 through most of 2021 will very likely be remembered as the dismal zenith of the pandemic era. One of the unexpected but defining features of this period was the way it spurred people to invest money they couldn't spend on travel, dining, concerts, sporting events and innumerable other experiences that were effectively canceled for over a year. Instead of shelling out disposable income on entertainment, many people with the means to do so instead invested it in both the stock market and a plethora of incipient markets, including cryptocurrencies. This national and even global trend led to the months-long surge that eventually culminated in the all-time highs cryptocurrency holders experienced in the fall of 2021.

Around that same time, though, the world was easing back into something resembling normalcy, and people were starting to regain far more optionality with respect to how they spend their money. By early 2022, all the aforementioned pursuits were largely accessible again. In other words, cryptocurrencies suddenly had to compete for people's money with a vast range of experiences that were unavailable to us for almost two years. By February and March of this year, the pandemic-era effect — in which Americans were investing heavily in new and emerging markets like cryptocurrencies — was predominantly gone. Henceforth, cryptocurrencies would have to survive and thrive without the unexpected but undeniable facilitation of a global pandemic.

3. Volatility among risk assets

Although cryptocurrencies like Bitcoin and Ethereum have long been touted by their fervent, hyper-vocal fanbases as powerful alternatives to the stock market, the reality has become somewhat more nuanced. Over the past several months, the two forms of investment have become increasingly correlated with one another, and tumbles in the stock market now usually foretell commensurate or worse falls in the price of crypto. Part of what's going on is that people are beginning to perceive cryptocurrencies the way they perceive technology stocks — as high-risk, high-reward assets that may not be the best investments during times of instability and upheaval. Which brings us to the final headwind.

Related: How to Demonstrate Leadership Through Market Volatility

4. The war in Ukraine

Finally, the ongoing conflict in Ukraine may be negatively affecting the price of cryptocurrency. During times of major geopolitical uncertainty, people feel far more comfortable investing in the safest, most conventional and consistently proven asset classes. Suffice it to say, for all their considerable virtues, cryptocurrencies are none of those things. Until peace and stability are achieved in eastern Europe and on the world stage, people will continue to be shy about risky assets that may have once yielded stellar returns. Why? Because if something catastrophic were to happen that violently shook the global economy, those risky assets would almost certainly be the most vulnerable.

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