While we’re not looking at the specific reasons, we can look at some of the common reasons that have contributed to the recent decline. The War in Ukraine, Inflationary fears, and higher interest rates all played a part in the recent crypto market crash. UST and TerraUSD (US dollar-backed cryptocurrency) may have been involved in Bitcoin’s drop as well. If these factors are a factor in today’s crypto market crash, then it may be a good idea to hold on to a few cryptocurrencies.
War in Ukraine
The rise in political and military tension in Ukraine has shaken the crypto market’s safe-haven narrative. Besides the fact that the U.S.-Russia relationship is in a bad spot, the conflict in Ukraine has also pushed the wider financial markets into risk-aversion mode. Wall Street stocks are down today, but gold prices have spiked, up more than $1,900 an ounce. Moreover, investors have begun to flee into the safety of government bonds, which has pushed up their prices and led to lower yields.
The war in Ukraine has forced people to seek alternative means of financing. While a few hundred dollars in bitcoin may not mean much, the Ukrainian army received $650 million in weaponry from the United States last year. Moreover, the Ukrainian army is severely outnumbered. That is why it is so important for everyday people to understand the technology behind it. In addition, war has hurt the average person far more than it does the elite.
Investors are fleeing the crypto market this morning after BofA Securities warned that inflation is creeping into all corners of the economy. The inflation fears have prompted investors to sell bonds for a second straight session and offload crypto. Equity markets have also been trimming their positions after Schiff’s warning that “HODLers” will soon need to sell their digital coins to pay their bills. If inflation fears continue, long-term buyers will also need to sell their digital assets to make ends meet.
The latest Consumer Price Index (CPI) report shows that inflation jumped 8.6% in May. With such a high figure, it is no wonder that investors are staying away from risky assets. The tightening monetary policy of the Federal Reserve is also causing havoc in the crypto market. Moreover, investors are feeling uneasy about the future of cryptocurrencies, which are extremely volatile and sensitive to inflation. Back-to-back bad news from the crypto world has created a lot of FUD. Many cryptocurrency enthusiasts have expressed their anxiety on social media. And experts predict that the crash will continue to escalate and will be much worse than it is today.
Higher interest rates
The Federal Reserve has raised interest rates by 0.50% – the largest increase since 2000. While interest rates have generally increased over the last year, the last time the Fed raised rates was in 2000, when President Bill Clinton was president and the dotcom bubble hadn’t burst yet. Higher interest rates could depress crypto currencies further. But if interest rates stay low, the crypto market will continue to rise.
The Fed has raised interest rates twice this year, and the markets sat up when the central bank was about to tighten policy again. The crypto market and most risky stocks peaked in November 2021. The stock market is forward looking, so the expectation of higher rates has had a negative impact. But in the short-term, a rising rate can be good news for crypto. It will keep the overall market from crashing.
TerraUSD (UST) played a role in Bitcoin’s crash
While it’s difficult to understand how the UST of the cryptocurrency could have played a part in Bitcoin’s crash, we can understand why its rapid rise in the first place. The sudden drop in its value sparked speculation about the role it may have played. The rise of UST prompted regulators around the world to take notice. The U.S. Securities and Exchange Commission (SEC) and South Korean prosecutors both opened investigations into the collapse.
The UST, a stablecoin, has been a major factor in the recent crypto crash. This algorithmic stablecoin uses a basket of cryptocurrencies to maintain its value. Under normal market conditions, this process is effective. But the crypto market crash shattered this peg, and the Terra foundation was forced to buy excessively to regain the peg. This led to the price of UST plunging dramatically.
Currency lending firm Celsius pauses withdrawals
After a week of high market volatility, the CEO of cryptocurrency lending firm Celsius has announced that the company has suspended all withdrawals, inter-account transfers, and Swaps. The move was made to stabilize the firm’s liquidity and give customers a better opportunity to meet withdrawal obligations. Celsius has yet to announce a date when withdrawals will resume. Although the firm promises to return to normal operations as soon as possible, delays are likely.
As a result of the extreme market conditions, the biggest cryptocurrency lending firm Celsius Network has halted withdrawals and transfers. The suspension is raising concerns about the firm’s financial stability, as its customers have largely been unable to withdraw their funds. As of May, the firm reported $12 billion in customer assets, with 1.7 million users. This move has resulted in a steep decline in the price of the company’s native token, which fell more than 50% to just $1.21 a coin.