Cryptocurrency markets have been crashing since the beginning of this week, and some experts are wondering why. The answer may be rooted in the same factors that have hit stock and bond markets: rising interest rates.
The market has dropped about 50% from its all-time highs in November 2021. It’s now trading at its lowest point in more than six months.
1. Terra’s Selloff
In the past week, no crypto has taken a bigger hit than Terra’s LUNA token. Less than a month ago, this crypto was trading near $100 per token, but it’s now down over 98% in value.
The reason is simple: UST, the algorithmic stablecoin based on Terra’s LUNA platform, recently lost its peg to the US dollar.
Traditionally, stablecoins are backed by customer deposits, and their value is anchored to the currency they are paired with. However, UST is an “algorithmic stablecoin”—one that relies on its underlying algorithm to maintain its value by printing a sister token called Luna.
To keep the two tokens stable, when one dips below the other, users can swap them at a fixed price. This is supposed to create liquidity and a one-to-one peg between the two coins.
2. China’s Crypto Crackdown
The price of bitcoin, the largest digital coin by market value, plunged more than 7 percent on Friday after China announced it was cracking down on crypto mining. The nation is concerned that the energy-hungry process through which bitcoins are created, known as mining, is hurting its environmental goals.
China’s stance against cryptocurrencies, largely stemming from concerns over money laundering and hard-to-track currency outflows, is the most significant recent crackdown on this volatile asset class. It’s also the latest in a series of moves to combat what Beijing sees as an unfriendly and unstable financial ecosystem.
In September, China’s central bank banned all transactions involving cryptocurrencies, saying they were risky for the economy and could lead to capital flight. It also issued a ban on cryptocurrency mining, which eats up huge amounts of power.
3. Bankman-Fried’s Demise
Sam Bankman-Fried, the former head of crypto exchange FTX, was a big player in the burgeoning crypto industry. He attracted investments from high-profile venture capital firms such as Sequoia and Temasek, Singapore’s sovereign wealth fund.
But when the 30-year-old’s cryptocurrency empire collapsed, it was all over for him. He lost virtually all his personal fortune in a matter of hours, as the crypto exchange he co-founded collapsed and another trading firm he had also founded, Alameda Research, filed for bankruptcy.
This demise has caused a ripple effect that has rocked everyone in ftx’s orbit, and the wider cryptocurrency market. It is one of the biggest reversals of wealth in history, and has caused a serious shakeup in crypto’s image.
4. Rising Interest Rates
If you’ve been paying attention to the markets, you know that there has been a lot of volatility in crypto and other risky assets lately. It’s largely due to rising interest rates.
For one thing, the US Federal Reserve has been raising its target rate since 2016. It’s a move designed to slow the economy by making it more expensive to borrow money and to help temper inflation.
However, it’s important to remember that the Fed can back off on these rate hikes or reverse them at any time. This means that your future will be a little more difficult to predict than you might expect.
Despite these challenges, there’s still value in digital assets like cryptocurrencies and gold. That said, you should be wary of putting too much money in these markets.