The Crypto Meltdown: What is Fueling The Latest Crypto Crush?

In what has been dubbed the “crypto meltdown,” the value of cryptocurrencies has plummeted in recent months. After reaching dizzying heights last fall, the market has now crashed, with the value of the cryptocurrency market dropping from $2.9 trillion to less than $900 billion in just a few short months.

This dramatic decline is primarily due to high-profile financial collapses at Bitcoin, Celsius, and Terraform Labs, which have collectively erased hundreds of billions in market value. Coinbase, the largest crypto exchange in the U.S., has also seen its value drop by nearly 50% since January.

Ed Moya, a markets strategist at the financial company Oanda, says, “the crypto industry is on fire, and most investors are just racing to the exits because there is a complete loss of faith in the space.” So, what is fueling this latest crypto crush? Read on to find out!

5 Reasons Behind the Crypto Meltdown

Several factors are contributing to the recent decline in cryptocurrencies. Let’s take a look at some of the most important ones:

Crypto Regulation

2022 has been a wild ride for cryptos. While the market was on an upward trend for many years, things worsened when China announced a crackdown on cryptocurrency exchanges. In 2021, China banned crypto mining, exchanges, and initial coin offerings. This sent a shockwave through the market, causing prices to plummet.

In the wake of China’s crackdown, other countries have quickly followed suit. South Korea, India, and Russia have all enacted strict regulations on cryptocurrencies. At the beginning of 2022, the Russian central bank suggested a ban on cryptocurrency use and mining, citing risks to the country’s monetary policy autonomy, residents’ well-being, and financial stability.

The Biden Administration and Treasury Department have also signaled their intention to crack down on cryptocurrencies. In February, the Treasury proposed new regulations requiring cryptocurrency exchanges to verify the identities of their customers.

These proposed regulations are still in the early stages, but if they get enacted, they could significantly impact the market. These regulatory measures have put a damper on the crypto market, and it’s one of the main reasons behind the recent meltdown.

Interests Hikes

Another factor contributing to the crypto meltdown is the recent interest rate hikes by the U.S. Federal Reserve. 2022 started with a bang when the Fed announced its first interest rate hike in over a decade. The Fed continued to hike rates at a faster-than-expected pace as the year progressed.

These aggressive interest rate hikes have made borrowing money more expensive, which has negatively impacted the crypto market. When borrowing costs go up, it becomes more costly to buy cryptocurrencies. This is because most people purchase cryptocurrencies with leverage, which means they buy with borrowed money.

As interest rates continue to rise, the cost of borrowing money will continue to increase, which will likely set further downward pressure on the market. In turn, the stock and crypto markets continue seeing a huge downfall as investors sell off their digital assets, causing a bloodbath in the crypto market.

The Rising US Dollar

The Fed’s interest rate hikes have also hurt the U.S. dollar. As interest rates rise, the dollar’s value increases because investors tend to move their money into investments that will give them a better return.

When the dollar goes up, it makes cryptocurrencies more expensive for people who hold other currencies. For example, if you’re holding Euros and the dollar goes up, it will take more Euros to buy the same amount of Bitcoin. It has a negative impact on demand for cryptocurrencies, and it’s one of the reasons behind the recent crypto meltdown.

Hacks and Scams

There have been several high-profile hacks and scams in the crypto space in the past few months.

DeFi protocols were the target of some of the most significant cryptocurrency breaches of 2022, such as the $625 million Ronin network hack of the video game Axie Infinity in March.

Some of these thefts, like the Axie affair, have been linked to North Korean hackers. An additional crypto bridge attack: Nomad loses $190 million in a ‘chaotic’ hack. Nomad’s hack is estimated to have been even more chaotic than the original attack on DeFi.

Theft and fraud are always a concern in cryptocurrency, but they have been especially prevalent lately. These hacks and scams have had a negative impact on market sentiment. The value of most cryptos is solely determined by investor sentiment, in contrast to equities, which get underpinned by underlying assets.

Negative sentiment can lead to a sell-off, which we’ve seen in the crypto market over the past few months.

The Terra-Luna Fiasco

In May, a stablecoin called TerraUSD and its sister coin Luna fell by roughly 80 percent, causing ripples in the broader crypto market, including Bitcoin and Ethereum. Nearly nothing is left of Terra Luna.

These coins’ implosion resulted from several factors, including mismanagement, fraud, and bad business decisions.

Because of this, investors are now terrified, and even ferociously bullish cryptocurrency investors are suddenly frightened. Fear is the main factor that drives a bearish sentiment in the cryptocurrency industry.

As Terra Luna went down, crypto investors panicked and started selling other coins as well, ultimately destroying the crypto market.

Coinmarketcap approximates that the total market capitalization of the cryptocurrency industry is currently $1.2 trillion, which is less than half of the $2.9 trillion it was in November 2021.

What Does This Mean For Crypto Investors?

It has been a rude awakening for most investors, especially those who got into the craze in 2021. Globally, the value of all cryptocurrencies increased to $3 trillion in 2021.

Coinbase, eTero, Crypto.com, and FTX spent millions of dollars to purchase advertisements during the Super Bowl, and crypto companies signed sponsorship agreements with professional sports teams.

These businesses’ pitch was that the crypto industry represented the future of the financial sector, and it was best to avoid missing out.

Most investors were drawn in by the technological allure of cryptos but were unaware of the risks they were committing.

Now that the market has crashed, these investors face massive losses. Today, the crypto market’s value is $900 billion, which is a staggering $ two trillion loss in just a few months.

Financial analysts compare this market crash to the dot-com bubble of the late 1990s, and it’s still vague how long it will take for the market to recover. For now, crypto investors are licking their wounds and trying to figure out what’s next. In the meantime, ensure to do your research before investing in any cryptocurrency.

What Does This Mean For Crypto Companies?

The sharp falls are driving some companies to the brink of insolvency. The industry is still very young, and most companies do not have the same level of a financial cushion as more established businesses.

Due to the crypto market’s spring collapse, Coinbase Global Inc. reported an unexpectedly huge second-quarter of losses in August.

According to the company’s announcement, Coinbase lost $1.1 billion, or $4.98 per share, in the second-quarter compared to a profit of $1.6 billion, or $6.42 per share, in the same period last year. Revenue decreased from $2.2 billion to $808 million in one year.

A sell-off that began in November has severely hurt the entire sector.

Companies like Voyager Digital Holdings Inc. and Celsius Network LLC file for bankruptcy protection in the U.S, especially now that they can’t meet customer withdrawal requests.

Celsius, a crypto lending firm, saw its assets fall from $515 million to just $50 million in three months.

Just weeks after the failure of TerraUSD, the issues at Celsius are undermining trust in the more significant cryptocurrency sector.

Celsius, a provider of digital-asset lending and borrowing services, is the latest crypto company to face insolvency after the value of Bitcoin and other digital tokens tumbled.

More than twenty smaller exchanges have closed. Earlier this month, two other publicly traded cryptocurrency companies, Galaxy Digital Holdings Ltd. and Marathon Digital Holdings, recorded more losses than they had a year prior.

The industry’s problems are mounting, and it is still unclear how long it will take for the market to recover. For now, crypto companies are reacting by reassessing their future plans. For instance, Coinbase reduced its staff by almost a fifth in August as the company looks to cut costs.

Cryptocurrency supporters still believe that the “crypto winter” could produce a “crypto spring.” In the past, we have seen severe declines being followed by a powerful comeback.

However, according to Moya, the outlook for cryptocurrencies has changed along with the economic environment.

In reality, the crypto sector will likely experience more pain, including other financial markets, if the Fed keeps raising interest rates and inflation remains high.

Conclusion

The crypto meltdown has been brutal for everyone involved. Companies are bankrupt, investors are losing money, and the industry’s future is uncertain. Be sure to stay up-to-date on the latest industry news to make the best decision for your investment. In the meantime, it is essential to do your research before investing in any cryptocurrency.